Outlook for '99: Sell dollars, buy things

The view from the world's financial exchanges; Just as the world turns, says James Grant, so will commodity prices

COMMODITIES were the inverse of internet shares in 1998. Tangible and gravity-prone, they generated steep losses for speculators and producers alike. In the week before Christmas, the Goldman Sachs Commodity Index fell to a 26-year low. Seasoned speculators have never seen the likes of it.

As it's the prophecy season, I will venture a forecast: commodity prices, especially the gold price, will rally in 1999. The gold forecast comes easily; I have been bullish before. I am more bullish today because the global monetary system is undergoing profound and disruptive change. Late in November, an organ of the People's Bank of China issued a little- noticed statement to the effect that China owned too many dollars and that diversification was in order, including diversification into gold, the monetary asset even the Swiss have proposed to sell. The gold price has mainly been going sideways or down since January 1980; it has good reason to go up in 1999.

As for commodities in general, the age-old cure for very low prices is very low prices themselves. Let things get cheap enough and producers will make less, and consumers use more. In the 1970s, ultra-high prices of metals, grains and energy spurred production and stifled consumption. What followed was the commodity bear market of the 1980s.

Now, probably, the opposite train of events is under way. On form, generation- low prices in coal, hogs, gold, crude oil etc will reduce production and stimulate consumption.

There are two principal reasons to buy commodities: first for consumption, and second as a hedge against price inflation. The double rub is that industrial production is weak, in and out of Asia, and there is no inflation to speak of in the industrialised world, except in financial assets, which is the kind of inflation nearly everybody is in favour of.

Like the average internet stock, the average commodity offers no dividend yield and generates no profits. There, however, the similarity ends. Equities are known to appreciate, commodities to depreciate, so why bet against an evident sure thing?

In short, because the world turns. The fact is that nearly every commodity is a "weather crop", natural gas and crude oil no less than wheat and corn. In this day and age of just-in-time inventory management, it would take only a medium-size drought or a winter of only mod-erate severity to cause a bullish tilt in supply and demand across a range of markets.

The monetary environment is another latent bullish influence. Just as Alan Greenspan, chairman of the Federal Reserve, is named the Financial Times Man of the Year, the dollar is meeting competition from the euro as a monetary store of value. There has been no such challenge in 50 years. Where it might lead is anyone's guess, but monetary stability is not the outcome I would rate odds-on.

So for the new year, a resolution: sell dollars (and the internet stocks denominated in dollars); buy things.

James Grant is the editor of `Grant's Interest Rate Observer', New York (www.grantspub.com).