"I would like to ask your opinion about the current stage of the commodities super-cycle, which some analysts say is over. Here is a recent WSJ article which focuses on commodities significantly underperforming equities after about 5 years of moving in lockstep almost daily. One of the main reasons of the commodities underperformance (and we saw more downward pressure in recent days) is increasing supply, brought to market thanks to high prices in previous years, which begins to exceed tepid demand. Probably nowhere the change in supply-demand balance is evident better than in the oil market. Also, since inflation expectations, despite all the money printing, had not materialized, many investors cut their bets on commodities as an inflation hedge."

David Fuller's view Thanks for an interesting email.

I think you assessment is basically correct. However, I would also add that commodity supercycles are created by increasing consumer demand, and eventually also speculative purchases at a time when producers of natural resources, having struggled during the previous cyclical downturn, are unable or unwilling to increase supply sufficiently to meet the new surge in demand.

The commodity supercycle accelerated to new highs in 2007 and the first half of 2008, when the economic recovery and also speculation in tracker funds drove prices to unsustainable highs as you can see on this weekly chart of the unweighted Continuous Commodity Index (Old CRB).

There is an important saying in commodity markets: 'The cure for high prices is high prices.' They sap consumer demand while eventually encouraging producers to invest in higher production capabilities. The surge in crude oil prices during the first half of 2008 (Brent & WTI) contributed more to the subsequent economic downturn than most people realise.

However, led by renewed speculative and investment demand for gold and other precious metals, the Continuous Commodity Index (CCI) bottomed in December 2008 and surged higher for over two years, at a time when the global economy was struggling to recover. Adverse weather conditions also lifted many agricultural commodities during the same period. Those headwinds in the form of high commodity prices have been a factor in the generally slow global GDP growth over the last few years.

Nevertheless, they are now dissipating. The declines in gold and silver prices over the last two years have helped to discourage investment in commodities. More recently, less adverse weather conditions have lowered prices for staple foods such as corn, soybeans and wheat. Most significantly, the successful development of fracking technology by the USA, although not yet widely utilised, is beginning to reduce the risk of another spike in crude oil prices.

In conclusion, if weather conditions are not too adverse over the medium term, agricultural and industrial commodity prices may not pick up significantly until the global economy is clearly stronger. Meanwhile, the currently declining CCI is reducing the commodity price headwind. This Index will have to sustain a move back above 600 to confirm that commodity price inflation is increasing once again.

Currently, the commodity supercycle is in a broadly ranging phase but with a downward bias since it last tested 600 in September 2012. A break in the medium-term progression of lower rally highs will be the first clear signal that demand is regaining the upper hand.