Commodity Bull Cycles & Bear Cycles

Although any individual commodity can experience different rates of growth, taken as a whole commodities can also be described as experiencing bull cycles and bear cycles. These cycles are brought about not only by the market forces of supply and demand, but also certain policy decisions by major governments, especially when it comes to tangible specie standards in relation to national currency fluctuations and valuations.

Because so many governments base the value of their currency against the value of the currency of other nations, as opposed to a tangible specie standard, both gold and silver do not play the same kind of pivotal role in international economics that they did forty years ago. Despite this, the fluctuating value of some major commodities, like gold and silver, can influence how other investors perceive the overall commodities market. If gold has an exceptionally high price per ounce in a given year, the commodities market can be said to be flourishing, whereas if the price drops for several years in a row, financial analysts can sometimes use this to point to the emergence of a bear market.

The difficulty with describing the performance of so many different commodities as experiencing an overall growth or retraction is that there are always exceptions to the rule. The best predictor of a predominantly bull or bear commodity cycle tends to be the size of the population relative to the amount of production. The period of the 1980’s to roughly 2000 has been described as a bear market for commodities because demand growth was not very high.

Starting in about 1999/2000, several nations that previously had virtually no measurable interest in metals began aggressive manufacturing operations, dramatically increasing the demand for previously unremarkably valued metals such as zinc and copper. This sudden interest in metals correspondingly drove up the demand for gold and silver, as investors interpreted the demand for zinc and copper as the beginning of a bull commodities market. Additionally, as the manufacturing operations continued to expand, the increased economic prosperity brought about a new group of consumers, who began to buy other commodities like eggs in much greater numbers. The increased investment activity, combined with actual tangible demand by new populations, subsequently resulted in an actual bull commodities market.

Therefore, the quantity of certain commodities is frequently a predictor, or at least an indicator, of these bull and bear cycles. Oil, for example, can frequently swing the commodities market one way or the other based on how much of it is produced, simply because so many other industries depend on the energy that oil inadvertently produces. As an example, a steep drop in oil production which results in higher gasoline prices can affect the transportation of agricultural commodities. This produces artificial constraints in supply and demand, and can impact the overall prices of other commodities. However, because oil frequently experiences fluctuations in its supply, many experienced commodities investors and traders anticipate certain seasonal fluctuations, and may build these anticipated supply / demand shifts in to their investments. These secondary effects are therefore a somewhat predictable part of the overall market.

However, it should be noted that since many commodities indexes make their money based on expectations of performance, an extreme shift in the production of the amount of oil or another high profile commodity can correspondingly cause the futures market to either perform up to or below expectations. A completely unexpected rigorous drop in the production of oil may trigger a bullish market, whereas oversupply tends to saturate the marketplace, creating a bear market. However, although certain high profile commodities can influence these cycles, the commodities market is varied enough so that only truly major global events can significantly impact demand. Even in the case of a major global event, such as a tsunami, one sector of the commodities market may fall, while another may rise.

Some economists have argued that the economy itself generates these cycles, based not only on major global events and supply and demand, but the very nature of investing itself. Certain economic theories, such as the theory of Kondratieff cycles, have attempted to describe the complex nature of the global economy as experiencing longer-form cycles that can be interpreted as a series of booms and busts, triggered by certain behaviors.