The concept of value in commodity markets is not well-defined. Many have viewed value as the deviation from longer-term prices, for example, the 5-year moving average. I always view long-term value in the context of production or replacement costs relative to demand. As prices fall, marginal production is cut and there is the potential for supply and demand imbalances. Low prices solve the problem of low prices - and markets will mean-revert. Commodity markets have been on a strong up move. Prices are now above the 5-year rolling average and the average itself is turning higher. Looking at the divergence from the long-term average prices are cheap, but there is room for upside and the highs of 2014 have yet to be reached. In an inflationary world, commodities are still a good location for capital.
No comments:
Post a Comment