COMMODITY PROSPECTS
more money into the commodities com-
Figure 1: Commodity Prices Since 1957
plex than ever before.
These two trends have primarily been
responsible for the increase in commodi-
ties prices. Both are still very much in
place, even allowing for partial reductions
in demand due to temporary, cyclical
declines in overall economic activity. Even
as the world is being hit by recessionary
conditions, it must be noted that demand
for many commodities continues to
expand. In other markets, demand is in
fact falling, although the declines in
demand are far less than market com-
mentary suggests.
Meanwhile, supply responses to the rise
in prices as a consequence of increased
fabrication and investment demand have
been slow. This in part has been due to the
lack of investment in commodities produc-
ing industries, which were impoverished
Source: CPM Group
during that earlier 20-year bear market.
Some observers believe that this repre- The Future
sents monetary authorities pumping- All of these forces have boosted prices sharply higher. Now, in
up money supply to stave off a reces- 2008, economic growth has slowed in the US and the slowdown
sion or worse. Again, this is misplaced spreading to most other parts of the world. The economic pain is
and not based on data. A closer look at expected to grow worse between now and the middle of 2009.
the sources of wealth creation – and Beyond that, there is a good possibility that economic recovery will
transfer – shows that the rise in this his- come fast and strong, boosting real economic growth once more.
torically large pool of investable funds The most likely economic scenario is for the current period of reces-
pre-dates the current economic slow- sionary economic conditions to be relatively short and shallow, as
down and shift in monetary policy by have been the two previous recessions, in 1990 and 2001. These two
years and has its roots in the real glob- recessions were among the shortest and shallowest in history and
al economic expansion that has been were spread apart by some of the longest periods of recession-free
underway since 2002. real growth in at least two centuries. The volatility of real economic
growth has been reduced, both in the US and globally. This reflects
The Basis of the Rise in better economic conditions due to a combination of many factors,
Commodities Prices including automation and computerisation, which allow better plan-
Commodities prices have risen as
much as they have since 2001 due to a
Economic conditions suggest that the current
complex mixture of trends and events. period of weakness ... is likely to be
First and foremost, there has been an
relatively short and shallow
upward shift in the fabrication demand
curve for most commodities, reflecting ning on the part of governments, industrial concerns, and investors.
strong long-term real economic growth It also reflects the benefits of financial and economic deregulation
and expansion around the world. The around the world – from the US starting in the late 1970s to China
rise of emerging industrial countries has in the past decade. It reflects the internationalisation of labour, the
unleashed a surge in demand for all rise of lower cost, more efficient international shipping, financial
sorts of goods and services of unprece- market deregulation, the rise of non-bank debt financing, amongst
dented proportions. This has obviously many other trends. It may seem heretical to some of the more dem-
boosted demand for most commodities. agogic market commentators, but the stronger, less volatile econom-
Even with the current economic slow- ic growth patterns of the past quarter century also reflect better
down, demand is still rising strongly on monetary policy management starting in the early 1980s.
a long-term basis, and remains very Economic conditions suggest that the current period of weakness in
high compared with previous levels. the US and global economies is, as stated, likely to be relatively short
There has also been an upward shift and shallow. None of the trends that have contributed to the reduc-
in the investment demand curve, as tion in economic volatility and stronger, more durable overall econom-
more investors are interested in putting ic growth have been reversed or reduced. If anything, these trends are
34 SEPTEMBER 2008 COMMODITIESNOW
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