Why the Sell-Off in Commodities is a Good Thing
The commodities rout this week has raised questions about whether the bull-run in the sector is over, and more worryingly, whether it's a bad omen for the global economy.
But one strategist thinks the sell-off is actually a good thing because commodity prices have risen too far, too fast. Jonathan Barratt, Managing Director of Commodity Broking Services also believes the correction will ease pressures on company profits from rising input costs.
“We feel that prices at the markets have finally woken up,” Jonathan Barratt, Managing Director of Commodity Broking Services, told CNBC on Friday. “The returns and the value of commodities are just too high, and we are just seeing a realignment. That's what we are seeing and I think it will continue just for a little bit longer.”
Barratt also thinks the sell-off has created a buying opportunity in gold . Gold prices have fallen for four straight days, and the metal has lost 5 percent since hitting a high of $1,563 at the end of April.
With inflation still a significant concern, Barratt says gold remains a good bet and he's sticking to his price target of $1500.
"I think gold is one thing that remains certainly a solid investment if you can get it on that dip," said Barratt.
Oil , meanwhile, suffered its worst-ever drop on record on Thursday, tumbling 8 percent; a sell-off that spread to copper, which fell 3 percent in tandem.
Barratt believes there’s still further downside to copper, as prices have been artificially inflated and does not reflect the weak state of the global economy. He expects COMEX copper to grind lower towards $3.60 per pound. Currently, June futures for COMEX copper trade at $4 per pound.
Barratt notes that a correction in commodities is a positive for the global economy, as it helps lower input costs, particularly for the United States.
"If the U.S. had lower cost of inputs, then you've got real profits being returned to the companies, rather than profits that we know or realizing are purely based on the stimulus packages which we've been pumped with over the last six to eight months," he said.