Miller: Commodity prices will peak within two years

Legg Mason’s Bill Miller is calling time on the commodities bull market and says he expects prices to peak within the next two years.

Miller, chairman and CIO at Legg Mason, says in the past decade commodity price growth had enjoyed its second best 10-year rolling return for 200 years, and he expected it had now run its course.

“Over the next one or two years you should see a peaking of commodities,” he says.

“The key will be rate rises and it could take a few years, but commodities do look expensive on a historical basis.”

Commodity prices have tracked Chinese and EM equities over the past decade, but a disconnect has now opened up with commodities continuing to soar in value while equities declined, he says.

Francis Scotland, director of global macro research at Legg Mason subsidiary Brandywine Global, says this is a sign commodity prices had moved ahead too far.

Scotland noted the CRB Raw Industrial index, used as a proxy for commodity prices, had raced ahead of the MSCI Asia index since 2010, having tracked it very closely.

“This suggests commodity prices have advanced too far too fast,” he says.
Brent, currently trading at $115 a barrel, has soared from around $80 six months ago, and other commodities have also seen sharp jumps.

Scotland also warned rising commodity prices were in danger of becoming a victim of their own success as soaring prices taxed consumers and caused usage of goods such as petrol to drop.

“Rising prices are a tax on consumption throughout the world,” he says.

“Real wages are not keeping up with that inflation, and the consumer remains the weak link in the global recovery so far, so we think commodity prices are at risk from this and we should see a correction.”

Scotland adds gold was under threat from rising rates after climbing from $1,250 per troy ounce to its current level of $1,427.

He says: “Real rates are going up and that is not constructive for real assets such as gold. It is not a positive story for gold as it will cost more to hold it as rates rise.”