The super-cycle that drove a huge boom in commodity investment over the last decade is well and truly over, according to UBS's Mark Rider.
The Australian head of investment strategy, who has also worked for the Reserve Bank of Australia as head of economic activity and forecasting, says that the combined forces of supply and demand which contributed to the sector's explosion over the last decade are now driving prices lower.
"On the demand side, China is settling into a more moderate pace of economic growth, while developed economies struggle with deleveraging headwinds," he said.
"Global industrial production, after sustaining a 5%-plus pace of growth for most of the 2003-2008 periods, is now weaker and more cyclical."
Aluminum, nickel, zinc, natural gas, oil, iron ore, hard coking coal and thermal coal are well off their highs while soft commodities like cotton and wheat have also fallen dramatically.
"Deeper mines, lower-grade minerals, more remote and challenging locations and shortages of both labour and equipment have pushed up costs," Rider added.
He argues that while these falls may represent an attractive entry point for more cyclically influenced commodities like metals, iron ore and coal, deleveraging headwinds and China's slower pace of growth suggest only a muted uptick in the future.
While many commentators have argued that a continuation of the Fed's quantitative easing policy should support fresh highs in precious metals such as gold and silver, Rider believes gold prices could weaken if inflation is held in check by sustained excess capacity.
"A more aggressive phase of QE with outright monetisation of government debts may be required for the gold price to sustain new highs," he explained.
"The commodity super cycle's end is at hand. There's no better cure for high prices than high prices themselves, which incentivise new supply and encourage substitution. The scene is set for a momentum shift."
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