MacroScope

Why are commodities surging?

June 3, 2009

Interesting take on the rise in commodity prices from Julian Jessop, chief international economist at Capital Economics. The rise has little to do with the weaker dollar and everything to do with expectations of global economic recovery, he says.

The broad-based revival in commodity prices since March clearly reflects a combination of factors. One of these is the pure accounting effect of the depreciation of the dollar. Other things being equal, a fall in the U.S. currency will of course put upward pressure on commodity prices when measured in dollar terms – commodity producers with bills to pay in other currencies such as euros and pounds will require a higher price in dollars, while consumers outside the dollar bloc will be more able to pay that higher price. However, the movements in currencies have generally been small compared to the underlying movements in commodity prices.

Looking closely at the relative performance of different commodities, Jessop reckons the rally has primarily been led by oil and industrial metals, which are the most sensitive to the economic cycle. Inflation-driven commodities such asĀ precious metals, including gold, have underperformed in the rally, he says.

Jessop takes all this to mean that higher commodity prices are just another manifestation of the growth in confidence about the global economic outlook. However, echoing investors who increasingly want to see concrete evidence, he warns that the anticipated pick-up in growth-based demand has yet to actually materialise.

Is it all just an illusion, then? Wishful thinking that allows forĀ a rebuilding of depleted stocks?

Comments
5 comments so far | RSS Comments RSS

WHAT WILL HAPPEN TO THE COMMODITIES AND THE MARKET WHEN THE USD DOLLAR CONTINUE TO FALL?

USD DOLLAR FALLING IS NOT A BAD REASON. It would BOOST the economy since US MARKET are specialized in technology, such as HP, Computer chips and many others product.

In coming month, we will see the recovery in export, due to high demand from other countries; they have benefited high VALUE in term of currency against USD dollar and would increase from time to time. It is a good sign of recover by the end of this year if the USD dollar continues to depreciate.

It has been the last few years when Bush Administration trying to appreciate the Yen, and found impossible to do that, now they have change different tactic by depreciate the USD dollar, that mean more EXPORT GOOD and less IMPORT, that also mean their account deficit would reduce rather than OVER FLOW.

US has always been the major player around the globe, they would find this year and next year will help them over spending in import good from China since their currency has been drop over 20% against world wide.

The Chinese would lose BIG BUYER like a UNITE STATE of AMERICA; however they have go different way by negotiated with COMMODITIES producer such as GIANT BHP, RIO TINTO that they have to cut 30 to 45% in commodities price. Soon we may find GOLD will drop back to $900 and OIL would drop back go $50.

What happened if COMMODITIES, GOLD, OIL FALL, the MARKET WILL FALL WITH IT

Let see the NEXT FEW WEEKS to find out!

 

Could it just be that strategic securing of long term resources is leading the price run up, and there are fundamental forces at play supporting that-

http://www.reuters.com/article/innovatio nNews/idUSTRE5521LL20090603?pageNumber=2 &virtualBrandChannel=0

The China deal with Petrobras, their involvement in securing global resources for the long term supply of their economy, in that context the run up makes sense

If that is in effect what is happening then it is self reinforcing somewhat as other nations have to counter or risk being out of supply of critical commodities

 

Just follow the institutional money, just like last year. This is whats driving the pick-up, call it artifial demand.
Not Goldman can use discount window miney to place bets on oil. Get these finance folks out of the market. They dont produce oil and they dont use oil.

Posted by Steve Vickers | Report as abusive
 

We don’t need big words or many words for this. The traders see profits and would like to get the money. The US government may have to regulate commodities on a supply and demand basis and take the traders out of the market since these are life essential items. The economy is still very weak and will remain there until some true growth takes place. We need to ask ourselves if we really need Wall Street and the Traders, as all they seem to want is money off the top and do not serve a useful purpose in maintaining a steady supply at a reasonable price.

Posted by f belz | Report as abusive
 

Why not speculation by hedge funds and banks flush with TARP money that no one has any intention of lending in a recession? After all, hedge fund speculation in oil drove it from $80 USD a barrel to nearly $150 in a little over a year. Of course the money is going into stocks and other vehicles as well. Note the major banks are only making money on trading and not lending so that should give you a clue they are using funds borrowed from taxpayers to speculate and then them back from their winnings. Only this time, unlike the oil bubble, they are hoping for increased economic activity instead of being certain of it–so they are proceeding a bit more carefully even though they are using OPM (other people’s money) and hence have less risk.

Posted by advocatusdiaboli13 | Report as abusive
 

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