Gary Shilling: This Should Terrify Commodity Investors Everywhere

Commodity Sector
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Gary Shilling Delivers Dire Warning to Resource Investors

Despite a weak year for commodities, famous economists like Gary Shilling think resource prices will continue to drop. Raw materials are traditionally sensitive to demand in developed countries and Shilling warns that North America is still in a period of deleveraging. The worst is not yet over for commodities.

Shilling commands a strong enough reputation for people to begin paying attention. He earned a degree in physics and a doctorate in economics from Stanford before eventually founding Merrill Lynch’s economics research department.

According to Shilling, the commodity rout makes sense within the context of world events. The stock market crash of 2008 ushered in an era where developed nations were more concerned with offloading debt than borrowing to consume. (Source: Caution: More Commodity Price Weakness Ahead, Bloomberg, October 5, 2015.)

The post-recession economy is growing slower than ever, keeping demand for commodity-based products low. Overall, Shilling’s appraisal is a negative one.

“It seems the price of everything that is grown or pulled out of the ground—from oil and gas to sugar and copper—has declined 46% since early 2011,” says Shilling. “Meanwhile, supplies of almost every commodity are huge and growing.”

Gary Shilling Goes Bearish on Commodities

Shilling’s argument of commodity supplies expanding in the face of weak demand is rare. Many pundits are quick to reassure the public that low commodity prices will cause some producers to leave the market, rebalancing supply and demand to a fair price.

Not so fast, says Shilling. China’s rapid expansion and seemingly insatiable appetite for raw materials had spurred expansion. Firms launched new projects to extract copper, coal, and iron ore. These projects demand heavy investment and long-term commitments.

“[Producers] assumed surging demand from China would last indefinitely,” said Shilling. “All that new capacity began to come on-stream in 2011, just as it became clear that the hoped-for post-recession return to rapid global economic growth wasn’t occurring.”

Worse still, the cost to cancel projects may outweigh the cost of completing them. As a result, the commodity market will continue to sag under an excess of supply. By way of advice, Shilling issued a simple warning: “Prepare for further big declines.”

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