2016 is only 3 weeks old and it has already managed to redefine the concept of growing pains. It seems that growth will not come despite all the pain. Investors have been unable to find a safe haven for their money so far, triggering suspicions of another large scale financial downturn. With the memory of the 2008-09 recession still fresh in our memories, it is necessary to be prudent and find the value hidden in all this turmoil.
Of course, the whole debacle originated in China and the various North American oil patches. The former is facing an economic landing, which however soft it may be, is spooking investors. The latter made oil so cheap, it triggered a pro-cyclical reaction from traditional producers trying to defend market share at all cost. The result, an economic downturn that seems to be spiraling out of control.
It seems that at some point, the economy will come full circle. It is well known that economic downturns make people look for the king of all safe havens: gold. Now the price of gold is reacting and seeing gains. This can spur a commodity led economic recovery of some sort, ironically so. Considering the medium and long term outlooks, it would make sense to pick up some commodity contracts while they are low.
Even if China keeps on slowing down, demand for commodities will eventually catch up with supply, giving counter-cyclical investors an opportunity to profit in the future. In the short term however, it seems that commodities besides gold will continue to feel the brunt of current economic woes. But if the value of gold increases fast enough, it will trigger a recovery of other commodities, down the road.
Gold can help other commodities on 2 fronts. The closest gold substitutes that can be considered to be financial safe havens as well, should benefit from increased demand for gold. On the other hand, if the price of gold reaches a certain point, it will trigger investment in new mining projects. This should, over the medium term, help other commodities like oil, since these projects tend to be energy and labor intensive.
In the meantime, both of those scenarios are quite distant, mainly because the focus is on falling demand from China due to its slow down. Right now it is clear that the game is one of wild cards. If any sizable country like India, has a growth spurt and starts importing more and more commodities, then there will be a commodity led recovery that may even see the price of gold stabilize instead of increasing. In the meantime, the outlook for gold is strengthening and investors should be analyzing the possibility of other commodities following suit. For the past few days, the value play was clearly to go for gold.