Quantcast
Other Stories
The extreme rise in commodity prices across the board began in the middle of 2010, after the debt crisis in Europe and after the Fed announced its Quantitative Easing program to buy back $600 billion in treasury securiti..
23 Mar 2011
FLORIDA (Commodity Online): Investors need not look to Asia or other emerging markets for higher returns these days. Record price levels are being recorded daily in the commodity markets, and although most experts agree that current trends are unsustainable, the recent pullback in prices does not even qualify as a “correction” from most market perspectives. The simple fact is that there are not enough raw materials, whether hard or soft commodity by nature, to meet increasing global demand. Since major contract prices are tied to the value of the U.S. Dollar, a major portion of the recent run up can also be attributed to the weakening of our national currency.

The current turmoil in the Middle East and the devastation in Japan do not help matters either. Higher commodity price levels appear to be here to stay, but what are the drivers that will impact future prospects in these markets? Certainly a stronger Dollar will cause prices to level off. The extreme rise in commodity prices across the board began in the middle of 2010, after the debt crisis in Europe and after the Fed announced its Quantitative Easing program to buy back $600 billion in treasury securities, an action designed to increase the money supply at the expense of a weakening Dollar on a global basis.

While energy prices have been kept in check until recently, basic metals have continued their appreciation runs that began in July. As a leading indicator of a global economic recovery, demand for Copper and the resulting increase in prices have been viewed as positive. Steel prices have also followed Copper, confirming the increase in overall industrial activity around the world. Cotton, however, has been off the charts, but technical indicators for all commodities suggest that prices have leveled off, awaiting their next move after a period of minor consolidation.

While inflation hovers around 2% in the developed economies, such is not the case in emerging market countries. Officials in China and India are presently dealing with double-digit inflation. The prospering middle classes in both countries are desirous of better lifestyles, including better homes, cars, clothing, and the food that they eat. The fact that the Chinese currency is “pegged” to the Dollar does not help matters either, but demand from these two markets will continue to put pressure on raw material prices for decades to come.

Canada is a commodity-rich country, and one important benchmark for commodities is a monthly index that is produced by the economists at Scotiabank Group, one of Canada’s premier banking organizations.

From a long-term perspective, the chart reflects that commodity prices broke free of the “100” index level during the past decade, more than doubling over the period. Inflation adjusted figures also spiked 75% over the same timeframe. While many economists focus on China demand and its manufacturing transformation as the true driver of a “super-cycle” growth phase where commodity prices remain elevated, the simple fact remains that current price levels exceed production costs to a high degree. There are incentives for producers to step up supply or users to substitute where surpluses exist.

As the global economy prepares for a new period of stable growth, the pressure on commodity prices will vary by category class. Different patterns will emerge for each driven by insufficient production, delayed supply responses, price controls, population and income growth, technological innovations, and a general lack of investment. Supply will struggle to keep up with demand, and shortages will also cause tension and market volatility.

FOREX TRADER
YOUR RESPONSE
Click on the image to reload it
Click to reload image
COMMENTS (0)

@2013 COMMODITYONLINE ALL RIGHTS RESERVED