Wednesday, June 26, 2013

Economy 2013: Good News From The Commodity Front

(Drivebycuriosity) - Today gold continued its free fall and dropped another $45 (3.6%) . The blogger Scott Granis commented that the yellow metal continues to realign with commodities (scottgrannis). Since September 2012 the bulk of the commodities, measured by the UBS Bloomberg CMCI Composite USD Price Indes (bloomberg), has been moving south.

It seems that the great bubble in commodities is popping. Since the early years of this century Goldman Sachs and other banks had been banging the "buy commodities" drum. They advertised oil, gold, wheat and other commodities as investment alternatives to stocks & bonds. According to the banks a "super cycle" had started as a result of an allegedly growing commodity scarcity that should drive commodity prices north for decades. A lot of hedge funds and other speculators followed and pumped many billions of dollars into commodities which caused rising prices - a self-fulfilling prophecy.

But the high & rising commodity prices induced the usual economical reactions. Commodity suppliers increased production as a response to higher profits. For instance the US oil production is climbing because the high oil price induced massive investments in exploration techniques like fracking. On the other side consumers started to buy less commodities. For instance US oil demand is falling thanks to less driving, gas-saving cars and other more efficient machines.

Falling commodity prices is good news for consumers and the economy. People have to spend less and keep more money to purchase other goods which could be a boost for retailers & other consumer companies. Falling commodity prices also curb the inflation rate. Hence I expect that interest rates rise less than the market expects because high interest rate are usually a result of a high & climbing inflation rate.

Falling commodity prices also signal that money that had flowed into those investments is now streaming back. This money could pour into the economy and into stocks leading to more economic growth and a further rise of the stock market.

No comments:

Post a Comment