In 2005, economist Nouriel Roubini warned of the American housing collapse that would follow a few years later. That, along with his other bearish calls that have played out, have earned him a reputation as a “permabear” and the nickname “Dr. Doom.” Roubini, the keynote speaker at next month’s “Inside Commodities” conference in New York City, recently spoke with ETF Report Editor Drew Voros about commodities as well as different aspects of the global economy, and it was hardly all doom and gloom. What follows is an excerpt from the full interview that can be read in the September issue of ETF Report.
It is pretty safe to say that the commodity supercycle is dead? From your perspective, what was the reason or reasons for its end?
Well, I don’t think there is one reason. I would at least separate between four categories of commodities; each one of them has a different dimension of demand and supply. One is oil and energy; the second would be precious metals. The third one will be industrial and base metals, and the fourth will be soft commodities and agriculture.
There are several factors that imply the corrections. One is that China now has had a very sharp slowdown. Even other, well-advanced economies are growing weakly now. There is also the weakening of growth in many other emerging markets that is going to bear down on global growth and on various commodity prices.
Secondly, in the oil and energy sector, the shale gas and oil revolution implies a significant increase in supply. There’s lots of shale gas and oil, but of course also discoveries offshore and in oil fields from Brazil to Colombia to the oil that’s been discovered in Sub-Saharan Africa, from Sudan all the way down to Mozambique. The supply of oil and energy is going to rise. And demand is slowing down because China’s growth is slowing down, and you also have a variety of measures taken by many countries to save on energy and become more energy efficient.
The other thing is that when commodity prices were high, investments were made to increase supply, whether it was in energy or base metals or agriculture or you name it. All the new supply is coming to the market. So now the supply curve has become more elastic, and therefore the increase in supply for any given demand curve is pushing prices down lower. This is a bit of a delayed cycle, and it’s a combination of many different stories—the China story, the energy-saving story, the shale gas and oil revolution, the delayed increase in supply coming from previous high prices and so on. It’s not just one story.
Another one of your firm’s accurate forecasts was gold’s slide that we certainly have been seeing over the last few months. Will gold fall more? Have we seen a little bit of a rebound over the last week or so?
There is a temporary rebound, but in spite of that, gold is still below $1,500, and it peaked at $1,900 in September 2011. Our forecast, medium term—meaning by 2015—is that gold is going down toward $1,000 an ounce, so from current levels, another 25-30 percent correction could occur. We have written extensively on the reasons for this:
- Tail risks in the global economy are lower than they used to be. The world is not going to end.
- In spite of the QEs, inflation is going to remain low because growth is weak, and therefore all this extra money is going into the reserves of the banks, as velocity is collapsing. If anything, inflation is now falling both in emerging and advanced economies. So buying gold as a hedge against inflation, in spite of all these QEs, is not a good investment.
- There is a global economic recovery. There are now other assets that provide both an income and a capital gain—from equities to even real estate—while gold has always been a play on capital appreciation.
- Real interest rates became very negative in the U.S. and globally. So at current levels, they can only go higher rather than lower because there is a strong relation in gold prices and real interest rates. However, slow as the normalization by the Fed is going to be, eventually there will be one, and the real rates are going to hurt things like gold.
- In a world where other advanced economies are weak and emerging markets are soft, the dollar may tend to appreciate, affecting the dollar prices of commodities, including gold.
Those are some of the factors. There are a couple of other factors as well. The main ones suggest that gold prices may be trending lower rather than higher. It may rise for one week or a month, but it is not going to be a trend. The question is, What is a trend as opposed to short-term volatility?
Do you see any diversification benefits of gold in a portfolio?
The question always with gold has never been black and white on whether you want to have gold in your portfolio. The issue with gold is always, Do you want to be market weight, overweight or underweight? In our view, in the past, there were reasons you wanted to be overweight. But now there are these five reasons to be underweight. It is because the gold prices are more likely to fall rather than rise.
What are your thoughts on other commodities?
We are concerned about base metals, because the slowdown of China may end up a hard landing, which implies that demand for things like copper and others could really sink. In the case of oil, we think the market can go slightly lower, say, toward $90 a barrel, but it’s probably not going much lower than $90, and $100 to $110 maximum; that’s the range for oil. Because demand is growing less and supply is increasing, you might have some softness in oil prices. But then there also is geopolitical risk. If there is a war between Israel and Iran, that could lead to an increase in the sale premium.
Soft commodities, especially agriculture and food, are slightly better supported and less cyclical. Emerging markets are still urbanizing and naturalizing, having high per capital income growth and having population growth with a few exceptions. Demand for food is going to rise over time.
Natural gas prices are going to go higher, as the U.S. starts exporting more. Prices are low in the U.S. and very high in the rest of the world. There’s a gap between very low U.S. prices and high global prices. That is going to be arbitraged.
Were you surprised at the GDP number that came out in late June? I saw you tweet previously that you thought it was actually under 1 percent.
At Roubini Global Economics, we have been much more cautious than consensus and policymakers about the U.S. and global recovery. We’re saying year-to-year growth is going to be barely 1.7, 1.8 percent. And next year, where people expect 3 percent growth, we said 2.4 percent. Guess what: Consensus at the beginning of this year was 2.3 percent, 2.4 percent. Now it’s 1.8 percent. So regarding next year—where three months ago consensus was at 3 percent, and we were at 2.4 percent —now consensus is down to 2.7 percent, and I think it’s going to be revised further downwards.
We have been, for many reasons, of the view that while the U.S. is recovering, there will be lots of head winds, starting with the fiscal drag and gridlock in Congress and the variety of weaknesses, particularly the household sector. We have been proven right. But in the short run, good news is good for the equity markets. And bad news is also good, because it leads to more and longer QE.
What’s your forecast for growth going forward?
Growth is going to accelerate in the second half and be very strong next year. We believe that growth is going to be slightly better in Q2 , and start to grow more in the second half. We expect tapering to start in December, with maybe the earliest start in September, and not being done next or late in the summer. Tapering could even start later than that if the economy in the second half of the year disappoints more than we expect. So it all stays contingent.
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