Commodities are flashing a once-in-a-generation buy signal

Commodities are flashing a once-in-a-generation buy signal, by Frank Holmes. The ratio of commodity prices (copper, oil, wheat, gold, soybeans,…) to equity prices (the stock market indices) is plumbing historical lows, and conditions are ripe for a reversal. This could be because stock markets are too high, or real stuff is too cheap, or both.

Since the commodities supercycle unwound nearly 10 years ago, many investors have been waiting for the right conditions to trigger mean reversion and lift prices. I believe those conditions are either firmly in place right now or, at the very least, in their early stages. Among them are factors I’ve discussed at length elsewhere—a weaker U.S. dollar, a steadily flattening yield curve, heightened market volatility, overvalued stocks, expectations of higher inflation, trade war jitters, geopolitical risks and more.

In addition, nearly 60 percent of money managers surveyed by Bank of America Merrill Lynch believe 2018 could be the peak year for stocks. A recent J.P. Morgan survey found that three quarters of ultra-high net worth individuals forecast a U.S. recession in the next two years. …

In a note this week, analysts at Goldman Sachs write that “the strategic case for owning commodities has rarely been stronger.” The bank recommends an overweight position, estimating that commodities will yield at least 10 percent over the next 12 months, with most of the gains being made by crude oil and aluminum. …

Also bolstering the commodities investment story is China’s massive ongoing “Belt and Road” megaproject, also known as the Silk Road Economic Belt. In a note this week, CLSA reminds us that the infrastructure initiative is still in its infancy, expected to be completed by 2049. It will cut through as many as 68 countries across Asia and Europe, affecting an estimated 62 percent of the world’s population. China has already spent approximately $180 billion to complete various projects, but many billions more will go toward building roads, ports, dams, high-speed rail, airports and more — all to “enhance regional connectivity,” as President Xi Jinping put it, and strengthen China’s economic clout.