The gold rush for commodities isn't over yet

...despite claims the super-cycle is dead.

We've been here before, haven’t we? Perhaps the clamour of Cassandra-like voices was not so great in 2011 when Spear’s previously wrote about the supposedly imminent demise of the commodities super-cycle, but it was nonetheless already a clamour. The past nine months or so have heard that clamour amplified several times over. 

The Financial Times declared that the super-cycle was dead at the end of June, only to declare about ten days later that rumours of its death were greatly exaggerated. Most recently, the Wall Street Journal reported that the broad consensus of analysts and investors has called the end of the super-cycle. 

But super-cycles tend to die slowly. The first identifiable commodities super-cycle in modern times lasted from 1894 to 1932, peaking in 1917, according to academics Bilge Erten and José Antonio Ocampo. The second lasted from 1932 to 1971, peaking in 1951, and the third lasted from 1971 to 1999, peaking almost as soon as it began.

Given that these three previous super-cycles lasted for twenty years or more, it is hardly unreasonable to expect the current super-cycle to last for another couple of decades.

The current super-cycle, which began in 1999 and may not yet have reached its peak, was founded on China’s urbanisation programme and construction boom, which began in the late Nineties. In 2011 China accounted for 40 per cent of global demand for iron ore and aluminium, 42 per cent of zinc and coal, 43 per cent of copper and lead, and 50 per cent of lean hogs.

If China’s GDP growth drops from around 10.5 per cent to 5.5 per cent over the next few years, as its policy-makers switch into a different growth model based on services and consumerism, will that translate into falling commodity prices?

While many analysts remain bearish, based on the assumption that the Chinese economy will experience a hard landing, Société Générale has come out strongly with a prediction that while gold prices are likely to fall further in 2014, to around $1,050 an ounce, the outlook for commodities will remain positive.

"It would take something dreadful to happen to make the super-cycle suddenly end," Michael Haigh, SocGen’s head of commodities research, told a media briefing in July. If you believe that the current super-cycle "is a function of population and urbanisation, you’re looking at another fifteen to twenty years. But it’s not going to be an upward price for all."

Haigh is not alone. Another analyst who doubts that the super-cycle is over is Eugen Weinberg, head of commodity research at Commerzbank in Germany. "Price movements in the market indicate an end to the commodities super-cycle," he has said.

"But we do not believe the super-cycle is coming to an end. It’s just taking a break. Twenty million people a year move from the countryside to the cities, triggering a huge demand for better infrastructure."

That infrastructure is likely to be more "steel-intense", with the demand for steel in residential construction expected to peak at around 2024, according to the Reserve Bank of Australia, at a level 30 times higher than in 2011.

The switch of those new Chinese town-dwellers to a diet consisting of more animal protein, combined with a global reduction in the amount of arable land, will drive up grain prices, as the cultivation of animal feeds and crops for biofuel compete for land use with other forms of agriculture.

Although the value of gold is not determined by industrial use, its price is nonetheless subject to many more factors than mere investor confidence. The fall in the gold price to well below $1,200 an ounce in June was largely the result of speculative trading in the futures market. (Goldman Sachs is thought to have made 15.5 per cent on its own book as a result of gold’s price fall.)

Meanwhile, central banks around the world have been building up their gold reserves. Russia, Turkey and Brazil have all been big buyers, but the main player has been the People’s Bank of China, which has a long-term plan for the renminbi to supplant the US dollar as the global reserve currency. To achieve that, the People’s Bank needs far greater reserves.

During 2012, according to Thomson Reuters GFMS, net gold purchases by the world’s central banks increased by 17.4 per cent on the previous year — the highest level in 50 years. We have no idea how much China’s reserve bank is spending on buying gold, for the simple reason that it does not want to tell us. China is on the horns of a dilemma.

On the one hand it wants to build up its gold reserves — from around 1,000 tonnes to 10,000, some say — but on the other hand it wants to avoid triggering a devaluation of the $3.14 trillion it holds in foreign exchange reserves. It wants to reduce its exposure to US dollar-denominated assets, yet at the same time it wants the value of those assets to be protected.

Investors may have fallen out of love with gold, but there is no shortage of counterparties ready to buy up physical gold. Far from damping down demand for gold coins, this year’s price fall has presented a price opportunity for numerous private buyers. Demand for South African Krugerrands and American Eagles has soared, while in India and China the demand for physical gold in the form of jewellery and bars continues to grow.

Indeed, India is importing so much gold (around 80 per cent of its current account deficit) that it has been toying with the idea of raising import duties on it. A third of the world’s annual retail demand comes from India, where gold is often bought during religious festivals, while China, the world’s largest producer, buys all its own production (about 361 tonnes per annum).

It is ten years since the first gold ETF was launched. Today, over 2,000 tonnes of physical gold are held in ETFs, making the ETF market the sixth largest holder of gold. Around 300 tonnes have flowed out of ETFs since the beginning of the year, a shake-out of nervous investors who had been nursing earlier profits. Gold still counts as sound collateral in a world of fiat currencies in economies seemingly hooked on quantitative easing.  

Just as with the ‘peak oil’ theory, there is a "peak gold" theory. According to this, declining ore grades and rising production costs mean that annual gold production is unlikely to exceed the current level of 2,700 tonnes, and future demand will easily outstrip supply.

There is a precedent for believing this year’s gold sell-off is a correction rather than  the bursting of a bubble. At one point during its upward trajectory in the Seventies, gold lost half its value, only to go on to increase in value by eight times thereafter.

Wherever one looks, and with certain exceptions such as coal, commodity prices seem to be going through a lull rather than an outright decline. One intriguing indicator that the game is not yet up is the fact that pension funds have stepped up their buying of commodities, believing them to be a compelling long-term, strategic play.

The Chinese economy will probably have a softer landing than some have predicted, with growth of around seven to eight per cent sufficient to guarantee rising prices. But the other key factor is the marginal cost of production. When mining companies are no longer able to afford the cost of extraction, supply dwindles and prices creep upwards. 

Christopher Silvester

This article first appeared on Spear's Magazine

Photograph: Getty Images

This is a story from the team at Spears magazine.

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David Osland: “Corbyn is actually Labour’s only chance”

The veteran Labour activist on the release of his new pamphlet, How to Select or Reselect Your MP, which lays out the current Labour party rules for reselecting an MP.

Veteran left-wing Labour activist David Osland, a member of the national committee of the Labour Representation Committee and a former news editor of left magazine Tribune, has written a pamphlet intended for Labour members, explaining how the process of selecting Labour MPs works.

Published by Spokesman Books next week (advance copies are available at Nottingham’s Five Leaves bookshop), the short guide, entitled “How to Select or Reselect Your MP”, is entertaining and well-written, and its introduction, which goes into reasoning for selecting a new MP and some strategy, as well as its historical appendix, make it interesting reading even for those who are not members of the Labour party. Although I am a constituency Labour party secretary (writing here in an expressly personal capacity), I am still learning the Party’s complex rulebook; I passed this new guide to a local rules-boffin member, who is an avowed Owen Smith supporter, to evaluate whether its description of procedures is accurate. “It’s actually quite a useful pamphlet,” he said, although he had a few minor quibbles.

Osland, who calls himself a “strong, but not uncritical” Corbyn supporter, carefully admonishes readers not to embark on a campaign of mass deselections, but to get involved and active in their local branches, and to think carefully about Labour’s election fortunes; safe seats might be better candidates for a reselection campaign than Labour marginals. After a weak performance by Owen Smith in last night’s Glasgow debate and a call for Jeremy Corbyn to toughen up against opponents by ex Norwich MP Ian Gibson, an old ally, this pamphlet – named after a 1981 work by ex-Tribune editor Chris Mullin, who would later go on to be a junior minister under Blai – seems incredibly timely.

I spoke to Osland on the telephone yesterday.

Why did you decide to put this pamphlet together now?

I think it’s certainly an idea that’s circulating in the Labour left, after the experience with Corbyn as leader, and the reaction of the right. It’s a debate that people have hinted at; people like Rhea Wolfson have said that we need to be having a conversation about it, and I’d like to kickstart that conversation here.

For me personally it’s been a lifelong fascination – I was politically formed in the early Eighties, when mandatory reselection was Bennite orthodoxy and I’ve never personally altered my belief in that. I accept that the situation has changed, so what the Labour left is calling for at the moment, so I see this as a sensible contribution to the debate.

I wonder why selection and reselection are such an important focus? One could ask, isn’t it better to meet with sitting MPs and see if one can persuade them?

I’m not calling for the “deselect this person, deselect that person” rhetoric that you sometimes see on Twitter; you shouldn’t deselect an MP purely because they disagree with Corbyn, in a fair-minded way, but it’s fair to ask what are guys who are found to be be beating their wives or crossing picket lines doing sitting as our MPs? Where Labour MPs publicly have threatened to leave the party, as some have been doing, perhaps they don’t value their Labour involvement.

So to you it’s very much not a broad tool, but a tool to be used a specific way, such as when an MP has engaged in misconduct?

I think you do have to take it case by case. It would be silly to deselect the lot, as some people argue.

In terms of bringing the party to the left, or reforming party democracy, what role do you think reselection plays?

It’s a basic matter of accountability, isn’t it? People are standing as Labour candidates – they should have the confidence and backing of their constituency parties.

Do you think what it means to be a Labour member has changed since Corbyn?

Of course the Labour party has changed in the past year, as anyone who was around in the Blair, Brown, Miliband era will tell you. It’s a completely transformed party.

Will there be a strong reaction to the release of this pamphlet from Corbyn’s opponents?

Because the main aim is to set out the rules as they stand, I don’t see how there can be – if you want to use the rules, this is how to go about it. I explicitly spelled out that it’s a level playing field – if your Corbyn supporting MP doesn’t meet the expectations of the constituency party, then she or he is just as subject to a challenge.

What do you think of the new spate of suspensions and exclusions of some people who have just joined the party, and of other people, including Ronnie Draper, the General Secretary of the Bakers’ Union, who have been around for many years?

It’s clear that the Labour party machinery is playing hardball in this election, right from the start, with the freeze date and in the way they set up the registered supporters scheme, with the £25 buy in – they’re doing everything they can to influence this election unfairly. Whether they will succeed is an open question – they will if they can get away with it.

I’ve been seeing comments on social media from people who seem quite disheartened on the Corbyn side, who feel that there’s a chance that Smith might win through a war of attrition.

Looks like a Corbyn win to me, but the gerrymandering is so extensive that a Smith win isn’t ruled out.

You’ve been in the party for quite a few years, do you think there are echoes of past events, like the push for Bennite candidates and the takeover from Foot by Kinnock?

I was around last time – it was dirty and nasty at times. Despite the narrative being put out by the Labour right that it was all about Militant bully boys and intimidation by the left, my experience as a young Bennite in Tower Hamlets Labour Party, a very old traditional right wing Labour party, the intimidation was going the other way. It was an ugly time – physical threats, people shaping up to each other at meetings. It was nasty. Its nasty in a different way now, in a social media way. Can you compare the two? Some foul things happened in that time – perhaps worse in terms of physical intimidation – but you didn’t have the social media.

There are people who say the Labour Party is poised for a split – here in Plymouth (where we don’t have a Labour MP), I’m seeing comments from both sides that emphasise that after this leadership election we need to unite to fight the Tories. What do you think will happen?

I really hope a split can be avoided, but we’re a long way down the road towards a split. The sheer extent of the bad blood – the fact that the right have been openly talking about it – a number of newspaper articles about them lining up backing from wealthy donors, operating separately as a parliamentary group, then they pretend that butter wouldn’t melt in their mouths, and that they’re not talking about a split. Of course they are. Can we stop the kamikazes from doing what they’re plotting to do? I don’t know, I hope so.

How would we stop them?

We can’t, can we? If they have the financial backing, if they lose this leadership contest, there’s no doubt that some will try. I’m old enough to remember the launch of the SDP, let’s not rule it out happening again.

We’ve talked mostly about the membership. But is Corbynism a strategy to win elections?

With the new electoral registration rules already introduced, the coming boundary changes, and the loss of Scotland thanks to decades of New Labour neglect, it will be uphill struggle for Labour to win in 2020 or whenever the next election is, under any leadership.

I still think Corbyn is Labour’s best chance. Any form of continuity leadership from the past would see the Midlands and north fall to Ukip in the same way Scotland fell to the SNP. Corbyn is actually Labour’s only chance.

Margaret Corvid is a writer, activist and professional dominatrix living in the south west.