The Hindu Business Line : `Fall in commodities part of bull market correction, not end of the rally'

Investment Guru, Mr Marc Faber believes it may not be the end of the five-year commodity rally, instead the current fall could be a part of a bull market correction.

Discussing metals, Mr Faber says gold will not be affected by economic slowdown, but copper may fall by another 30 per cent. He says industrial commodities may see more downside in the US.

MR Faber also sees the demand for oil in Asia doubling in the next 15 years and this demand will keep the crude prices up, he says.

Excerpts from CNBC-TV18's exclusive interview with Marc Faber:

Is this the end of the five-year old commodity rally?

No, not necessarily. One has to realise that in a trend in a bull market that may last 10-20 years or more, there may be periods of large correction. For example, in the last commodities bull market that happened in 1970-1980, the price of gold went from $35 to $875. The first peak was in December 1974, when gold hit $195 an ounce and then it fell $103 an ounce in August 1976 and after that it went up eight times.

For example, when the bull market in equities happened in 1982-2000, the Dow Jones in 1987 dropped 40 per cent before it went up another seven times. I think investors have become brainwashed that volatility will always stay low and that you cannot have corrections. That is precisely the point of the markets, they move from time to time and are big disappointments to wipe out, essentially the small speculators.

How much further do you see commodity prices falling from here?

We have to distinguish because different commodities move differently. What has not moved much on the upside in the last four-five years are the agricultural commodities and to me, they would seem to have relatively little downside risk.

Industrial commodities were driven by incremental demand from China and now from India. The whole world began to believe in the China story, which is fundamentally correct. However, there has also been a lot of speculation in commodities that have driven prices to above what the long-term trend is. So let's say, copper went from 60 cents a pound to over $4 a pound and now we are slightly below $350 a pound. It could easily drop 30 per cent and then we will have to see. This has been a peak for copper prices for a long time.

In the 1970-1980 bull market, commodities such as wheat, corn and sugar peaked out in 1973 and coffee, cocoa in 1977 and then the metals in 1980. So there can be early peaks in commodities in a bullish, long-term cycle.

That which goes up for the longest in a high eventually has the biggest correction. So what happens to uranium, which in your report says has gone up or has not gone down for 144 consecutive weeks?

I think energy is a special space, in the sense that demand for energy in Asia can only go up. Of course, imports of oil into countries like China will always be subject to fluctuations and there could be years when there is an inventory liquidation and so on. But in general, the long-term outlook for oil prices is very favourable due to the incremental demand that will come in Asia.

My estimate is that oil demand in Asia, which is now 22 million barrels a day will double in 10-15 years. And that production will not be able to fulfil the increase. So in that light, I am quite positive for Uranium from a long-term perspective.

So how as an investor, do you buy into that because there are just not that many uranium producers out there?

That is correct, there are some uranium companies, but these stocks are relatively high in my opinion. There are some funds that buy physical uranium in the United States, but this is more for institutional investors than for the retail investor. I am always arguing it is easy for you to buy an ounce or kilo of gold and store it in a safe deposit box, but difficult to buy a tonne of uranium and store it in kitchen.

You mentioned that copper may have peaked for sometime, but do you feel the same about gold?

My scenario is that there is a relative tightening of liquidity, it is not that liquidity is tight, but compared to the monetary expansions we had in 2001-2005, we have a slow down in liquidity growth. Therefore the asset markets will not perform particularly well for a while.

The US economy could suddenly find itself in a much weaker position than what is perceived right now. So industrial commodities would come down, along with housing, stock prices. Then in three-six months time, I suppose that the Fed head will be back and printing money and that is written about.

He has also pronounced in his speech that the Fed can take extraordinary measures. We also have a new Secretary of Treasury, Mr Paulson, who comes out of Wall Street specifically out of Goldman Sachs. I am sure that he is rather going to safeguard the interest of his colleagues on Wall Street than the man on the street. So he is going to be another money printer.

And objectively, I think that the US has no other option, but to print money. This would mean that the US dollar and US assets will be relatively weak. The question is weak against what and my view is against precious metals, whose supply has kind of increased to an extent.

Some would argue that for copper production, one needs things, etc. So if you expect demand from Asia for oil to double so dramatically, why not for copper, when gold is not used so much except for jewellery?

That is correct. What was interesting in the 1990s is that we were always saying how the demand in Asia for refrigerators and mobile phones and consumer goods would go up and that you should buy these appliance makers. What they overlooked is that actually the best play on these increased demands for consumption in Asia will actually lead to higher commodity prices. I accept all that and I have been a super bull on commodities ever since 2001.

But it does not change the fact that you can have big corrections. Now oil is a necessity of life that is very difficult to substitute. It is actually easier to substitute copper. Oil once burnt, is gone, whereas the recycling impact on copper and other metals is that you can use again and again. In the case of gold, I am quite optimistic because we have a rising demand in Asia. People will rather have a gold ring than a copper ring.

Secondly, we have had this huge accumulation of foreign exchange reserves in Asia and that is now approximately $2.3 trillion.

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`Fall in commodities part of bull market correction, not end of the rally'