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Has the bull market for commodities begun?

Siegfried Layda | Photographer's Choice | Getty Images

The bear market for commodities is over and it is time for investors to focus on this asset class again, according to a commodities analyst.

Goeff Blanning, head of commodities at Schroders Asset Management thinks that a new bull market for commodities has begun.

"Following five years of devastatingly poor returns in the market, sentiment towards commodities is at rock bottom, but it's starting to turn following the surge in the prices of a wide variety of products since the beginning of the year," he said, adding that the biggest price gains, in percentage terms, occur at the beginning of a bull market.

Explaining that the primary reason for investing in commodities should always be inflation hedge, Blanning argues that with the continued printing of money by the world's central banks, there is every reason to argue that higher inflation is coming in the future. "And one way to protect oneself could be through buying commodities."

The commodity sector has seen tough times in the past few years for reasons such as global uncertainty and overproduction. Crude oil prices have largely rallied since mid-January, after a steep and lengthy rout from June 2014 onward hit commodities across the board. The oil and gas sector is down nearly 25 percent over the past two years, while basic resources are down about 34 percent.


"For oil and gas, the global oversupply will come under pressure due to a lack of investments in these sectors. For oil, non-OPEC production is facing more declines as the effects of capex reductions are still to be seen. Even despite a price recovery since January," Hans van Cleef, senior energy economist at ABN Amro told CNBC via email.

He suggests while there are some specific commodities which may face some downside pressure like soybeans and sugar, he sees more upside potential for many commodities, mainly energy or metals.

However, Schroders' Blanning lists three factors that are at play when it comes to falling commodity prices. He argues that while the primary reason for the fall in price was overproduction which was made worse by the availability of cheap credit, the situation is very different today. "With prices down 70-80 percent in many commodities, production is no longer growing."

Furthermore, he blames the dollar bull market from 2011 to 2015 for weak commodity prices. Since most commodities are priced in dollars, it means they became more expensive as the dollar surged, he explained, adding that when the dollar is strong it generally forces foreign central banks to adopt tighter policies in order to support their currencies, which restricts liquidity creation.

"But this year, the dynamic has started to reverse as the dollar has weakened. Of course, the dollar could start to strengthen again, especially if the U.S. Federal Reserve starts tightening monetary policy more sharply."


Finally, the China-driven commodity boom may be over for now but a strong rising commodity demand from India is now starting to show, he said.

"India's demand for crude oil, for instance, is currently growing at a much faster rate than that of China, which is making a big difference to oil market dynamics, and Indian demand for a whole range of commodities, including palm oil, sugar, rubber and natural gas, is rising fast."

In the coming times, Blanning predicts India will become a very important focus for commodity market participants in the future. According to OPEC's monthly report, India's crude oil demand rose to 4.6 MMbpd, the second-highest level ever recorded in the country, in March 2016.

Naeem Aslam, chief markets analyst at Think Forex UK says a lot depends on the strength of the dollar and the Chinese growth.

"If we look at both situations, the only comfort is that the PBOC is determined to support the economy and the Fed is well aware of the bullish effects of the dollar. So as long as both of them tread them carefully, we think the bias could be towards the upside (for commodities)." He added the absence of a rebound in growth in China could bring some headwinds for the commodity market.

However, for Schroders' Blanning the commodities sector has already witnessed a turning point. "At least a dozen commodities have gained more than 10 percent this year and a number have gained over 30 percent; clearly, the bear market is over."


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