Legendary investor Jeremy Grantham believes that commodity prices will have many peaks due to the new China factor and the economic development of many poor nations, which will hold up demand for commodities in the long term. This is contrary to my belief, which is that commodities are like all other markets – there should be one major peak, not multiple. So who’s right? Jeremy Grantham, whom I deeply respect as a serious thinker, or myself, a small-timer who looks to history for answers?
Jeremy Grantham’s Reasons
- Commodity supplies are diminishing as we use up more and more of the world’s resources.
- Compared to the past, demand for commodities will be much higher in the future because 30 years ago, China was irrelevant. While commodity prices had one peak in the 1970s, that was because Chinese demand (and Indian, Russian, etc) was virtually nonexistent. In the future, constant buying from the Chinese and other developing nations will propel commodity prices to a long term plateau.
My Reasons
- Jeremy believes that from a fundamental point of view, commodities will have many peaks (due to non-stop demand). However, peaks aren’t caused by fundamental demand – peaks are caused by speculator mania. In essence, peaks are caused by investor psychology, which can never become very optimistic (and push markets to many peaks) more than once in a short period of time.
- The commodity secular bull market of the 1970s had one peak. I’m a big believer in cycles and since history repeats itself, isn’t it fair to say that the same thing (one peak) will happen this time?
- Jeremy Grantham’s words reminds me of “this time is diffferent”. From the 2007 credit bubble and the 2001 tech bubble, we can see that “this time isn’t different”.
So who’s right? I honestly don’t know. Althought I believe that “this time isn’t different”, Jeremy Grantham has never been wrong before. HOWEVER, there is a critical flaw in my reasons.
History Isn’t Long Enough
My second reason stated that since we can expect the past to repeat in the future, we can assume that this commodity bull market will end with one peak. HOWEVER, the past (for commodities) hasn’t been long enough! The whole idea behind using history to predict the future is to gather as much data as possible, find commonalities behind that data, and use those commonalities (in this case, the number of market peaks) to predict the future. Since commodity prices were controlled by the government from the 1930s to the 1970s, we only have 30 years of commodity history to study and predict the future with, which is hardly a large enough set of data to make any meaningful predictions.
So what do we do? Since commodity history isn’t long enough, we can’t assume that what happened in the 1970s will happen today.
What To Do
- Since history isn’t long enough, go further back in time and find out what happened during market peaks. Look at commodity prices from the 1800s to the 1930s (when the price freezes began). Although this isn’t as good as looking at free market prices in more recent history, this is all we’ve got because there were no free market prices from the 1930s to 1970s.
- Look at other markets. Since all markets are speculated by human investors, human psychology ultimately determines the short term market peak. Because human psychology is the same throughout history and across different markets (the feelings of fear, greed, etc), what has happened in the stock market will likely happen in the commodity market.
How To Invest When History Isn’t Long Enough
Although I believe my own view on the impending commodities peak is correct, I also respect Jeremy Grantham’s opinion. When the opinion of a highly successful investor differs from mine, I don’t do anything that goes against his or my market view. He could be right, or this might be the one out of 20 times that he’s wrong.
As such, I plan to hold onto my positions until the commodity peak has hit, and then sell out my entire position. I don’t intend on buying on the retracements because I don’t believe there will be multiple commodity peaks. Also, I don’t plan on shorting commodities after the peak has been reached because Jeremy Grantham Jeremy Grantham might be right – there may be several peaks.
very well thought out – i’d like to hear grantham’s response to your points!
Well thought out and great arguments on both sides, I follow your thinking of observing history for the answer
thanks for this advice, i will consider this as i am a newbie to investing
I appreciate this solid advice. Well thought out and simple once you think about it.
To me it seems that history teaches us that all markets are cyclical and commodities are no different.
Thank you – it’s an interesting read.
Interesting
My thoughts: history can repeat itself, but most things change due to changing times.
Investing is not my strong area (unfortunately, and hope to change that), but this is an interesting piece with strong arguments.
This quote from you: However, peaks aren’t caused by fundamental demand – peaks are caused by speculator mania.
This is what I was always taught so I would stand more by your theory.
Thanks for the advice!
It goes in cycles. Thanks for another great article!
Such great tips and insight. Love this part: Since history isn’t long enough, go further back in time and find out what happened during market peaks.
Solid points
good read!
very good points, youre points are better than jeremy’s..
I’m not well-versed in Grantham, but this was very thought-provoking!
Thank you for the advice!
Good advice.
History can be useful, but it’s never exactly the same.
Good well thought out advice.
Good Advice! I’m a newbie so I could use all the help I can get.
its good to listen to others’ advice even if you don’t agree. thank you for the tips.