The slump in global commodity prices, led by oil and gold, is looking ominous for producers, and great for consumers and economies like China, India and the US and Europe.
But the reasons for the fall are sending a different message; one that you might not want to hear: the rest of this year and much of 2009 is going to be miserable, more miserable than we have so far seen in 2008.
Oil prices eased further overnight after initially rising on the fighting in Georgia: prices fell under $US114 a barrel before closing at $US113.01 in New York.
Gold fell more than $US33 an ounce in overnight trading, and then fell a further $US4 an ounce in early Asian trading yesterday to trade around $US828 an ounce, the lowest level since late December, 2007.
It then rose a touch, then fell sharply by almost $US16 an ounce to trade around $US813 an ounce. Gold actually hit an intra day low in Asia yesterday around $US802 an ounce.It then recovered and traded around $US822 this morning.
Oil is now down more than $US33 a barrel form its peak a month ago of over $US147 a barrel, a fall of more than 22%. Prices have fallen more than $US6 a barrel from before the Georgia fighting started last Thursday.
But gold prices have plunged by more than $US50 an ounce since the fighting started last week and that is as good an indicator (along with oil) on the enormous switch in sentiment in global commodity markets.
The Australian dollar fell, rose and then fell well under 88 US cents in Asian trading yesterday, while the US currency jumped under $US1.49 to the euro to maintain its rapid appreciation. The Australian dollar was actually closing on 87 US cents late yesterday as oil and gold prices continued to weaken.It was at 87.60 US cents this morning.
A month to six weeks ago fighting in such a sensitive area, plus the bombing of a major oil pipeline, like the one in Turkey at the weekend, would have seen a surge in oil prices, while gold would have chased itself higher as nervous bears sought their usual haven of value or protection in volatile times. Now the normally nervous nellies in the markets don’t seem to care.
Investors no longer see commodities, especially gold and oil, as havens or plays to make money.It is an astounding change in sentiment.
The surge in the US dollar has become too powerful as momentum from big investors searches for new havens of safety. And they have found it in the US which they figure won’t lose as much as leaving money invested in Europe, Australia, New Zealand, or in commodities.
Markets like commodities would have reacted negatively to news of war in the Caucasus, which is an important oil-exporting region.
The fact that oil and gold prices keep falling strongly suggests that investors/traders now strong believe the world economy is in bad shape. That is bad for oil prices, gold and other actively traded commodities.
If you believe that speculators were responsible for some of the strong surge in commodity prices, then you have to blame them for some of the rapid retreat in commodities in the past month.
When we look back at this time we will see that the first 11 days or so of July were the peak of the current commodity price surge.
But while there’s good news in lower commodity prices, the fact that markets now reckon 2009 is going to be worse than this year isn’t good news.
There are some important statistics due out in Europe (eurozone growth for the June quarter) and the US (retail sales and industrial production) which could confirm the downturn in both giant economies, or at best, sluggish growth.
And what are big investors doing? Selling commodities (open interest positions, which are contracts not closed out or delivered on any given day) are falling, indicating that the investors who plunged into commodities, are retreating.
And they are buying US shares.
But for Australia there’s goodish news from China, with consumer price inflation down and signs the economy is not tanking in an inflationary spiral (See accompanying story).
This slump in oil and other commodity prices is sending a message that global economy will worsen, not improve: a message that the Reserve Bank has been very alert to.
It’s why the bank has been pushing a message of an incipient easing in monetary policy with a rate cut next month.
The Bank is angling to make a pre-emptive cut in rates (just as it launched pre-emptive rate rises, starting a year ago to tackle inflation) to allow the economy room to adjust to any further downturn in the global economy.
Reserve Bank Governor Glenn Stevens has made it clear on a couple of occasions that the bank moved early to act against inflation, not wait until inflation appeared, then act.
It’s why its reading of the global economy, and the rapid slump in domestic activity, has seen it push domestic economic growth to equality with inflation in its short to medium term policy objectives.
And that’s why the National Australia Bank yesterday warned that the RBA had to avoid engineering too hard a landing for the economy.
