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Change of trend

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Business Standard New Delhi
Last Updated : Jun 14 2013 | 5:21 PM IST
After a spectacular five-year run up the charts, commodity prices have dipped all of a sudden. Led by trend-influencers like oil and gold, they have experienced perceptible price erosion over the past one week ""long enough to suggest that this goes beyond the usual day-to-day market fluctuations. The new bearish outlook is borne out also by the trends in futures markets, where most commodities, barring some agricultural ones, are being quoted lower than even their current moderated levels. Gold prices, for instance, have remained below $600 an ounce for the past several days, and the prices for December delivery have plummeted to $586 on the New York Mercantile Exchange. A similar trend prevails even in Asia, one of the major gold trading regions and India, the world's largest consumer of this yellow metal, is no exception. Though Indian prices are partly influenced by the on-going Pitrapaksh (period for remembering dead ancestors), when many people do not buy valuables, the situation may not change by much even in the ensuing marriage season, if global prices remained subdued. Similarly, oil has dropped below $65 a barrel in the spot market and is quoted even lower, at around $ 63, for November delivery. The story in copper and many other key metals is no different.
 
This is dramatically different from what has gone on just before. For instance, industrial commodities as a whole have seen their prices climb by 52 per cent in the past one year, while the sub-set of metals has risen 75 per cent. That prices may have peaked became evident when steel prices took a tumble recently. It is interesting that the International Monetary Fund (IMF) had warned earlier this month that the price surge had reached unsustainable levels and would begin to peter out, though it did not predict such an immediate correction. What the IMF saw instead was a drop in demand, in response to the high prices, and a supply-side response through the expansion of mines and smelter output, but these were more in the nature of medium-term assessments. The immediate provocation for the last week's price drop lies elsewhere, therefore, and can probably be traced to the signs of a slow-down in the global economy, including that of key economies like the US and a bulk commodity consumer like China. Though some emerging economies, like India, continue to clock high growth, a sizable part of this growth is coming from sectors that are not commodity-based. The rising interest rates are another factor deemed responsible for the slide, as holding costs have begun to climb.
 
It is worth noting that the commodity sector is now driven more by supply-demand balances, and therefore is no longer influenced as much as in the past by global political flashpoints or by developments in the stock and money markets. That would explain why commodity prices have outrun both stocks and bonds in recent years, though it remains true that money continues to flow from one market to the other, depending on the perception of opportunities. Nor is the rise or fall of the dollar able to move commodity prices to the extent that used to be the case earlier. What this means is that, even if the market is awash in dollars that seek investment avenues, commodity prices will respond to pure market forces. In other words, watch for further signs of a global slowdown, in order to read the future of commodity prices.
 
 
 

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First Published: Sep 14 2006 | 12:00 AM IST

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