A worrying sign

A year or so ago a financial “expert” stated investors should liquidate their stockmarket holdings and place the proceeds in commodities.

That was a very bad judgement call. The stock market has climbed significantly and commodity prices ,by and large, have been relatively weak.

That drop in commodity prices amounts to a tax cut for consumers, but also it may be a worrying sign that global economic growth is slowing down, perhaps into a business contraction.

A surprising feature of the global economy over the past few years is that commodity prices remained relatively steady.

Even the decline earlier in the year still left commodity prices well above the levels prevailing at the end of last year. It would be expected that the weak performance of the world’s economies would drag down raw material prices.

China buys nearly half of the world’s copper supplies. Also, the leading Asian, African and undeveloped nations are consuming 20 per cent more petroleum products than they did four year ago. Yet, the demand from the United States and Europe has been declining. Despite last summer’s driving season, the average price of gasoline has slumped.

Commodity prices have been dropping throughout most of this year. They usually are a good leading indicator. Nevertheless, of course it is quite possible that the fall in commodity prices reflects speculators’ activities; there are many who bet on  a big drop in commodity prices.

However, there usually is a distinct correlation between energy prices and stock market prices. The fact equity prices stalled over the summer months may explain some of the weakness in commodity prices.

Needless to say, there is the possibility that the weakness is the result of a widespread belief in a sluggish economy. China and Europe have lowered predictions for economic growth in the coming months.

Too, the weakness in raw material prices may be only a pulling back of buying by countries, hoping to capitalize on the temporary (?) cessation of buying by many countries.

Commodity prices generally come down when high prices bring forth new supplies. The surprising development of shale gas in the United States may be a factor in energy price declines. On the other hand, agricultural prices have soared because of near-drought conditions in parts of North America.

However, central banks worldwide continue to debase their currencies. It is logical then to expect stronger commodity prices in coming months. It is too soon to cheer the drop in raw material prices as further strength is more likely.

Bruce Whitestone