(By Martin Hutchinson) Commodity prices have faltered in the last couple of weeks, and much of the "smart money" is saying the boom is over.
Don't believe it.
As long as the world's central banks keep interest rates at these very low levels, the speculative interest in commodities will be strong, and so will their prices. Since only minor central banks yet show signs of moving rates, the commodities bull market has further to run.
The commodities bull has already run a long way. Since Jan. 1, gold is up 20%, silver is up 50%, copper is up 100%, oil is up 110%, coal is up 90% and iron ore is up 60%. In a year of deep recession – with the exception of wimpy gold (which did not decline as much in 2008, because all the monetary "stimulus" made people fear inflation) – that's a pretty good run.
The Key Catalysts
There are three reasons why commodity prices have been rising, and they're all still true:
- China and India continue their torrid growth.
- Global stimulus plans are bullish for commodity prices
- And hedge funds and other speculative investors are big commodities players.
Let's examine each of these in more detail.
1. The "China Syndrome:" While the rest of the world has been mired in recession, China has had a pretty good year, and so has India. China's third-quarter gross domestic product (GDP) rose 9.5% from the same period last year, and India is expected to post an increase of at least 6%.
That has caused demand for raw materials to soar, because lifting the 2.5 billion inhabitants of those countries out of poverty generally requires lots of goods you can drop on your foot.
For instance, China leapfrogged the United States this year to become the world's largest automobile market, with sales of 11 million cars and light trucks. China and India show no sign of dropping back into recession. If anything, demand growth in those two countries is likely to continue, which in turn will put additional pressure on global raw materials supplies.
In general, we have plenty of commodities, but opening up new production takes lots of time and money, so rapid demand growth pushes up prices.
2. Money Talks: Stimulative global monetary policies have tended to push up the prices of all assets – but most notably commodities – in the last year. Those monetary policies aren't just a U.S. manifestation.
