Commoditie prices

These have been on the rise for some time now, due to both fundamental (supply and demand) and monetary (global money supply) reasons. Numerous macro and micro fundamental reasons come into play, including geopolitical issues such as political unrest in Egypt, weather issues experienced across the globe, which disrupt supply and strong demand from a growing China.

What are commodities?

These are essentially substances that come out of the ground and generally maintain a universal price. Typical is gold, copper and sugar.
A characteristic of a commodity is that its price is determined as a function of the market as a whole and with most commodities this includes both a spot price and a futures price.

While there are innumerable fundamental factors impacting prices, research has revealed that there is a significant negative relationship between commodity prices and interest rates across all commodity prices. I.e. lower real interest rates correlate with higher commodity prices.

There are various classifications of commodities, but for purposes of producing an index, the Commodity Research Bureau - CRB - segment commodities into 6 sub categories, each of which contains underlying constituents as follows.

• Energy, which includes crude oil, natural gas
• Grains, which includes corn, soybeans, wheat etc.
• Industrials copper and cotton etc.
• Livestock, comprising cattle and hogs etc.
• Precious metals, includes gold, platinum, silver
• Softs include cocoa, coffee, orange juice and sugar etc.

Jeremy Grantham from fund manager, GMO, made some comments on their thoughts on commodity prices.

“I fear that rising resource prices could cause serious inflation in some emerging countries this year. In theory, this could stop the progress of the bubble that is forming in U.S. equities. In practice, it is unlikely to stop our market until our rates have at least started to rise. Given the whiffs of deflation still lingering from lost asset values, the continued weak housing market, weak employment, and very contained labour costs, an inflationary scare in the U.S. seems a ways off.”

He goes on to say that “The complicating point is that in the recent few years, commodities seem to be making a paradigm shift. If this is so, it will be the most important paradigm shift to date. The bad news is that paradigm shifts cannot, by definition, be described well using history. It is all about judgment.”

The CRB index

Selected commodity prices, relative to the S&P500
Palladium, silver, Brent crude, gold, copper and platinum

The charts above clearly demonstrate the firm prices over the last 12 and 24 months.

So despite the very firm gains, we are likely to see more of the same in the year ahead. Naturally this is positive for a country such as South Africa which exports metals and some agricultural products, but at the same time the rise in oil and food prices is starting to come into the inflation numbers.

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966

Tue, 01 Feb 2011

Spot Prices

Index Summary

Stock Exchange News Service

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