Niall Ferguson: Dump Commodities Now

Looks like the good Harvard professor has made a shift in his personal portfolio.

Link to Niall Ferguson's incredibly well-timed (published April 24) Newsweek article here, which focuses on the dramatic story behind the copper boom and its 181% run-up since February 2009 (compared to gold's 75% increase over the same period).

From the article:

So just why has copper been trumping gold as an investment? The answer is partly that the extraordinarily loose monetary policies adopted by Western governments to combat the financial crisis have driven up the prices of nearly all commodities. 

But the key to the copper story is soaring Asian demand. Asians want modern houses with Western-style wiring and plumbing. They want cars. They want electronic gadgetry. So they want copper. In 2005 China accounted for 22 percent of global copper consumption. In 2009 the figure was 39 percent. Try as they may, the copper miners can’t keep pace. And the supply of copper in the world isn’t limitless. Indeed, if the rest of the world were to consume at just half the American per capita rate (1,389 pounds in an average lifetime), we’d exhaust all known copper reserves within just 38 years. 

Asians were shocked by the price spike of 2004–08, which saw copper prices quadruple; hence their recent rush to invest in copper mines. The big question now is whether this new scramble for Africa is worsening the disease it was supposed to cure. Rampant Asian demand has once again driven up prices. Higher commodity prices are feeding into higher consumer prices. Inflation in China hit 5.4 percent last month. That makes the authorities nervous. The last thing they want is the kind of popular unrest that was sparked by higher prices in North Africa. 

All over the world, central banks are applying the brakes. The European central bank has already raised rates. The Fed seems intent on ending quantitative easing in June. The People’s Bank of China, meanwhile, has not only raised rates but also increased reserve requirements for banks. Remember, this comes as fiscal policy is also being tightened in the developed world—even, belatedly, in the United States. Remember, too, that higher commodity prices act as a tax on consumers in importing countries. Higher prices plus lower growth equals stagflation. 

So far these changes have had little impact. But brace yourself. To my eyes, global monetary and fiscal tightening is a clear sell signal for commodities. That could take the shine off copper—and send a blast of cold air down the ventilation shafts of Zambia’s mines.