While low oil prices are good for soft commodities where energy inputs are crucial, they aren’t good for hard commodities like copper and other metals because it takes a long time for the cycle of hard commodities to play out.
As prices fall, producers need to produce more materials to cover their costs. But when the commodities prices crash, the producer is forced to sell below cost to get rid of the inventory and gain some cash flow.
According to Clem Chambers, CEO of leading private investors website ADVFN.com and author of Be Rich, The Game in Wall Street and Letters to my Broker, it will take another large financial shock for commodities to get back up to where they were.
Forbes has more information on Chambers’ commodity prediction:
The oil price is recovering. As I wrote in previous pieces, low oil prices are a cure for low oil prices. This is because energy is the foundation of economic activity.
Cheap energy is great, but the principle of the ‘greedy algorithm’ where grabbing as much as you can is the way to prosper means it can’t stay extremely cheap for very long.
The read through is that this rally in oil should mean a rally in other natural resources.
You might look at gold and say, oil up means gold up means other commodities to follow. This may well be true of soft commodities where energy inputs are key but it’s a trap when it comes to hard commodities such as copper and other metals. Oil and metals are different.