The US economic slowdown assures volatility for commodity stocks. During the past three years, China and the emerging economies have been the focus of commodity demand, but it’s easy to forget that a booming America has been just as responsible. But now US economic growth is slowing. What to do? At a time like this, I like to look at the commodity price assumptions analysts use when calculating their targets for mining and energy stocks. When doing that, I walk away with mixed feelings. In the gold stock arena, for example, I feel the $700/oz. price assumption used by several prominent analysts is aggressive. Similarly, most base metals analysts are too optimistic for my like. Although analysts project sharp drops in commodity prices for the long term (especially for copper, nickel and zinc), they believe current record prices can extend into 2008. When it comes to oil and natural gas, in contrast, I feel more comfortable. The analysts I follow use crude oil price assumptions of around $68 for this year, $62 for 2007 and $60 for 2008. Given strengthening demand from Asia and Europe and a messy geopolitical situation, these estimates are justifiable. With natural gas, most analysts use a commodity price assumption of around $6.50 for the next two to three years which, again, appears plausible. Even so, the reality of a slowing US economy could cause considerable volatility. In short: the long term theme for the commodity sector remains exceptionally bright, but be prepared for bumps during the coming weeks!
After the sharp increase in mining costs, be prepared for a similar trend in the energy sector. Recent statistics show that worldwide reserve replacement costs in the oil and natural gas industry are climbing at a ferocious rate. During 2005, costs among 150 companies across the production spectrum rose 29%. Unless the rate of increase declines back to the average during the past decade of roughly 10%, industry earnings will be negatively impacted.
As predicted, Iran is once again rebuffing the major powers. And why shouldn’t it? With Russia and China opposing sanctions, the consequences of not playing along with UN demands are modest. The worst that can happen to Tehran is that Moscow and Beijing will eventually agree to sanctions, which would presumably follow yet another warning period. But even if the UN Security Council achieved anonymity and threatened with punitive measures, it’s highly questionable whether Iran would obey. Defying the major powers has already brought Ahmadinejad immense prestige and power in the Islamic world. Even regional powerhouses like Saudi Arabia and Egypt have learned that opposing Iran’s agenda can quickly cause chaos in their streets. Moreover, Ahmadinejad has the means to respond to an international challenge. As he’s already threatened, UN sanctions could provoke Iran into disrupting tanker traffic in the Gulf of Hormuz. No one, including Iran, wants to push the current dispute to such excess, which is why the most likely outcome is that Iran will gradually progress on its path toward nuclear power. Washington’s politicians tell us it will take eight years until Iran has the bomb. I’d be surprised if it took half as long.
Insurgent attacks in Iraq keep rising, as the country moves closer to collapse. Put differently, the worst-case scenario for the US is now close. That scenario is a situation where the US can neither leave, nor increase troop size to realize a victory, and where Iraq becomes a client state of Iran.
You could convincingly argue that we’re already there. Pulling out US military assets would translate not only into a betrayal of the Iraqi people and the stated commitment to democratize the country, it would also translate into an immeasurable loss of American prestige and power. Sending more troops to Iraq may or may not further US strategic goals, but is an impossibility. Domestic political realities in the US barely tolerate a continued presence in Iraq; an increase in military assets is unthinkable. Meanwhile, Iran is well on its way to becoming a Middle Eastern hegemon, even before coalition troops consider scaling back. It’s probably safe to say that the only outcome that can prevent Iraq from becoming a de facto Iranian province is a partition into its Shiite, Sunnite and Kurdish parts. And that, from the viewpoint of human suffering and Western commercial objectives, would be the ultimate catastrophe. Protracted civil war would be a virtual certainty; Iraqi oil flows would be continuously disrupted.
Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!