"Hello, you mentioned in a recent Audio (Thursday, I think) that the secular bull market in industrial commodities in general has probably ended, and that the environment has become more spotty. That got me thinking about a medium term "game plan". If we see a China driven rally in the commodity complex, would you consider it appropriate to exit a broadly diversified portfolio (such as BRWM LN) and, after a pullback, perhaps nibble on something more commodity specific? As always, your views would be greatly appreciated."

David Fuller's view Thank you for a very interesting email.

The short answer on commodity shares or ITs such as BRWM LN, is that they have underperformed but show a continued build-up of underlying support. Consequently, if China is now in at least a medium-term bull phase, as I believe, then the miners should do reasonably well over the medium term. That would provide an opportunity to lighten commodity-specific shares on strength.

For perspective, I think we need to look at the very long-term picture in addressing these points, so I will show a historic, semi-log chart of the Continuous Commodity Index (Old CRB), dating back to 1962.

You can see two secular bull phases, basically 1972 though 1980, and 2002 until at least March 2011. Two different but related factors are largely responsible for these moves, in my opinion:

1) Demand finally increases following a long lull, which had been difficult for producers in terms of costs. Consequently, they were unable or unwilling to increase production quickly.

2) Even more importantly, an accelerated period of currency debasement occurs, which central banks will undertake for several years because a downturn in the global economy masks the build-up in inflationary pressures. To see how currency debasement distorts the true cost of commodities, look at this historic chart of CCI since 1962, adjusted for US CPI inflation.

I have long said that the overall bull market in commodities commencing in 2002 would be both larger and longer than its 1972 through 1980 predecessor, because globalisation and the increased use of capitalism (whether largely free market or authoritarian) would advance wealth creation for a larger global population. For instance, Asia was a comparatively small factor in the 1972 through 1980 commodity cycle, but it is the main demand driver behind the advance commencing in 2002.

Returning to the historic chart for CCI shown above, the bull trend commencing in 2002 has been a little longer and slightly larger than its predecessor, to date. Also, it would be premature to conclude that the March/April 2011 peak to date will not be exceeded over the next few years, because we have not yet seen a lower high and a lower low, suggesting a downward trend rather than a temporary correction in an uptrend. From current levels, this would require a close beneath 500 by the CCI Index. Conversely, a push back above 600 would increase the possibility for a test of the high, at least. Given that QE in recent years has been not only massive but also continues, it remains a tailwind for CCI.

Nevertheless, we have probably seen most of the bull trend for CCI, at least for a while, particularly if crude oil (which is still the world's most important commodity) has peaked on an inflation-adjusted basis. However, that would be a best-case outlook, in terms of energy costs for the global economy, given political instability in some of the oil exporting countries.