Although the weaker economic outlook had long been on the cards, in the maelstrom of the financial crisis investors put their money on a growing shortage of commodities. As we see it, reality has now caught up with the commodity market. While the commodity boom had benefited from the weakness of the dollar, in turn a strengthening dollar is now putting prices under pressure. Just as speculation played its part in record prices, speculative repositioning by hedge funds and outflows of capital from commodity funds are serving to push prices down. The combination of these factors points to a further fall in commodity prices. The bottom has not yet been reached, even if prices have picked up somewhat in the past few days.
For the individual commodities the slide has followed a broadly similar pattern, but a closer look at the various segments is still worthwhile. Starting with the oil market, the slowing economy and high gasoline prices have curbed oil consumption in the industrial countries. This is well showcased by the fact that in this year’s holiday season US motorists covered fewer miles than last year and there was also no evidence of the chronic refinery bottlenecks. Oil price developments are also percolating through to the agro market as the demand for biofuels has a decisive impact on agricultural prices.
Non-ferrous metals are feeling the pinch as China, the biggest consumer, shifts down a gear to somewhat more moderate growth. In addition, inflation expectations have eased of late on the back of falling oil and agricultural prices, dragging down the gold price.
Falling commodity prices will help fuel the economic recovery. However, the fundamental structural trends in the commodity market remain valid and in the medium term will enable a rebound. Most commodity prices will then resume their more moderate long-term upward trend.
You can find our Working Paper “Commodity market correction – back to earth with a bump?” at Allianz Economic Research (Publications/Working Papers)
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