Friday 5th December 2003
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The Reuters-CRB index is at its highest level for seven years. It has gained 9% year on year but 20% gains have been recorded for crude oil, gold and copper. Silver has gone up 16%. Live cattle and soy are up by a third and cotton by a half.
Analysts say the boom is driven by US growth, a low dollar, Asian demand, geopolitical tensions, low global interest rates and poor weather in some regions. Even so, some of the prices are startling. The rise in US beef can be partly explained by several factors but a 35% gain is almost inexplicable.
It may be a mistake to ascribe the boom to a supply shortfall; when the data are analysed, I suspect the boom will reflect additional demand.
Inflation is evident in some economies. The best market indicator is gold, which has reached a seven-year high of $US400/oz. Other precious metals, notably platinum and silver, are booming. Copper is also in demand and it is an indicator of anticipated demand in manufacturing.
Accounting for price increases in crude oil and natural gas is also quite complex. Opec has stated its price objective is $US22/bbl, but its behaviour seems to be more consistent with $US25, as it said it would cut production by 900,000bbl. On the other hand, a rise in tanker freight rates implies the cuts have not been as large as projected.
Opec was to meet on December 4 and the futures market has edged to over $US30. It should be remembered Opec's share of the market is only 38% and some non-Opec suppliers such as Russia are expanding aggressively. Supply is good so rising global demand has to be the best explanation of the rise.
In both oil and gas, prices seem at their tops and some traders will be closing out their positions. The bears will hang out for bad winter weather in the northern hemisphere in February-March 2004.
The overall impression of futures markets is that most prices (gold excepted) are near their ceilings. There will be an increase of short contracts. Yet politics always has a great influence on futures; a bomb here or there can change perceptions quickly.
The US dollar is the key to change. If it continues to lose ground relative to other currencies, the consequences will be positive for commodity prices. A rise in terrorist activity will also be seen as swelling the US budget deficit, and that will also affect the dollar.
Some exposure to commodities is likely to reap good returns. My best source of deep analysis of the futures markets suggests sharemarkets will go sideways for some time but commodities are set to rise.
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