Advertisement

The collapse in commodities

The fall in commodity prices has moved centre stage in investors' worries, with the pace quickening in the past few days.

"Just when investors thought it might be time for a summer lull" financial markets have a new drama. With a Greek exit from the eurozone off the table for now, at least the fall in commodity prices has moved centre stage, with the pace quickening in the past few days.

Advertisement - Article continues below

The Bloomberg Commodity index, which tracks 22 raw materials, has fallen by around 30% this year alone, and has now reached its lowest level since 2002. Prices have slumped across the board. Brent crude has fallen to a four-month trough around $53 a barrel. Gold is at a five-year low. Copper hasn't been this cheap since the depths of the global crisis. Unusually healthy American harvests are depressing grain prices.

Strong supply and weak demand

So commodity demand is in a structural slowdown. On top of this, while official GDP data "continue to helpfully meet Beijing's targets", as The Wall Street Journal's Liam Denning puts it, other numbers point downwards. Early this week, for instance, an index tracking the manufacturing sector slid to a 15-month low. The sector has been shrinking for five months now.

Advertisement
Advertisement - Article continues below

In recent weeks, huge losses on the Chinese stockmarket (albeit following a very rapid run-up), and the potential ramifications for the economy, have compounded jitters about an unexpectedly sharp slowdown.The Greek crisis has also fuelled worry over a further slowdown in Europe.

Advertisement - Article continues below

Meanwhile, most commodity markets look well supplied, especially the oil market. Oil cartel Opec is still pumping record amounts, while the number of oil drilling rigs recently rose by its highest weekly total in a year. So it seems that "shale producers are finding ways to weather low prices", say Anjli Raval and David Sheppard in the Financial Times. There is also plenty of industrial metal around, particularly iron ore. Finally, a US dollar bull market has always been bad news for assets priced in the American currency. With markets expecting a rise in US interest rates, the dollar's strength seems likely to continue for now.

Is the bottom in sight?

Of course, this could be a contrarian signal. "The pendulum has... swung too far towards pessimism," reckons Capital Economics. Overall sentiment has rarely, if ever, been more negative, yet the backdrop isn't as bad as all that. As far as China is concerned, recent stimulus has yet to kick in, while few Chinese private investors actually own shares, so the market slump shouldn't hit the economy hard. The likelihood is that global economic activity hit bottom in the first quarter, so demand should improve. Meanwhile, the supply of some base metals is beginning to tighten.

It's also worth noting that major mining companies haven't offered such high yields since the 1990s (apart from during a few months during the 2008/2009 crisis), says Helen Thomas in The Wall Street Journal. All this could spell opportunity. We'll be taking a closer look at the mining sector in next week's issue of MoneyWeek.

Advertisement
Advertisement

Recommended

Commodities look cheap
Commodities

Commodities look cheap

Gold may be on a bull run, but industrial commodities, including copper, zinc and aluminium, remain cheap.
17 Jan 2020
Don’t panic about Iran – but don’t sell your gold either
Gold

Don’t panic about Iran – but don’t sell your gold either

Markets have reacted calmly to the tension between the US and Iran. But don’t get too complacent. It’s still a good idea to hold on to some gold as in…
9 Jan 2020
Here’s how gold could rise above $7,000 an ounce
Commodities

Here’s how gold could rise above $7,000 an ounce

That the gold price could hit $7,000 an ounce is a logical and plausible possibility, says Charlie Morris. Here, he explains how it could get there.
30 Dec 2019
Gold is in a bull market – and it could have much further to go
Commodities

Gold is in a bull market – and it could have much further to go

Many investors forget that gold is still the best-performing asset of this century, says Charlie Morris. It could also have much further to go.
27 Dec 2019

Most Popular

How “support” and “resistance” can help you spot trading opportunities
Sponsored

How “support” and “resistance” can help you spot trading opportunities

Technical analysis can help traders manage risk and decide where to enter and exit a trade. One simple form of technical analysis is the concept of “s…
6 Jul 2020
House price crash: UK property prices are falling – so where next?
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020