Gold and commodity price declines good news

Good news for the global economy at last.  Commodity prices from gold and oil to copper and cotton have fallen sharply from their peaks this year and will help manufacturers and importers.

The decline will unnerve producers in Australia, Canada, Russia, South Africa, Brazil and other emerging nations, even though they have received a windfall since US Federal Reserve Board chairman, Ben Bernanke adapted quantitative ease since the end of 2008. The easy money policy and weak dollar encouraged investors and speculators to place money into precious metals, industrial raw materials and agricultural commodities. The downside was cost inflation for manufacturers and higher expenses for struggling consumers.

Investment demand for commodities via exchange traded funds, other index products and hedge fund and individual physical holdings, is around $412 billion estimates Barclays Capital. Holdings in gold exchange traded funds alone are some 77 million ounces worth US$123 billion at current prices. Since prices have peaked there have been investment outflows and more recently investors have sold gold to raise cash, bullion dealers say.

Investors and speculators who bought commodities early in the cycle profited considerably. Despite falls from their peaks this year prices are still way above their lows at the beginning of the decade (see table). The focus in the past week has been the disappointing performance of gold in the face of the eurozone crisis and expectations that the US Federal Reserve Board and the European Central Bank will print money and keep interest rates  at close to zero to counter recession.  Considering the extent of the run into gold during the past decade, however, a price setback in today’s volatile markets, was inevitable.

                                                     The Commodity Bubble Implosion

Commodity or index

Decade low 2000-2002

Date of 2011 peak

2011 Peak price

Price December 16 2011

%  decline from 2011 peak to Friday Dec 17

CRB Index

183

April

372

295

– 21

GSCI Index

180

May

770

618

-20

Crude oil WTI

17

May

115

94

-18

Gold

250

September

1923

1594

-17

Silver

4

May

49.8

29.9

-40

Platinum

449

September

1910

1424

-25

Copper

1440

February

10,200

7358

-28

Aluminium

1325

March

2800

2009

-28

Tin

3500

April

33000

18800

-28

Zinc

750

February

2650

1872

-29

Nickel

4250

February

29500

18100

-39

Cotton

29

April

220

86

-61

                                                     Source:- Neilbehrmann.net 

From its low of around $250 in 2002 to its peak of $1923, the gold price soared by 660 per cent, so the majority of investors are well in the black. Latecomers, however, must be nervous even though the HSBC bullion team, Merrill Lynch and several other firms predict average prices of more than $2,000 in 2012. Some bullion dealers say that the gold price fall has encouraged buyers ahead of the Chinese New Year in February. Others maintain that potential purchasers are holding back until the market settles down. Technical analysts contend that a support price of $1560 an ounce is crucial  and the price should break through $1660 an ounce before they become confident again.

The key to precious metals price prospects is the US dollar and whether the Federal Reserve will embark on another bout of Quantitative Easing in the first quarter of next year. A continual recovery of the greenback is bearish for commodity prices and further weakness is bullish. Predictions of gold prices are thus not worth the paper they are written on.

Recession in most of Europe, a sharp slowdown in China and India and lower growth in the US, Singapore, Asia and other emerging markets, imply that it is foolhardy to be over confident about commodity prices. A large overhang of producer, consumer and investor and speculator inventories in developed markets and China, indicate that the industrial commodities business could continue to be in difficulties. To be sure pension funds and other investors who followed investment banker advice to invest in commodities at the end of 2010 have generally been burnt. Metals merchants say that the supply demand fundamentals of industrial raw materials are poor as recession has cut demand while prices, which are still well above the average of the first half of the decade, have encouraged production. There has to be greater investment demand to take up the slack and boost prices. Instead investor liquidation of commodity inventories has played a major role in causing the price slide from 2011 peaks, traders say.

The big fear revolves around geopolitical concerns, notably Iran’s efforts in obtaining a nuclear arsenal and the West and Israel and Saudi Arabia’s potential moves to scuttle the plan. In those circumstances the oil price could surge and drag gold up with it. A higher oil price, however, would be an effective tax on global consumers and ultimately reduce growth, consumption and prices of commodities.

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