Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What Inflated the Commodities Bubble?

Commodities / CRB Index Aug 01, 2008 - 11:23 AM GMT

By: Salman_Khan

Commodities Best Financial Markets Analysis ArticleCrude Oil has corrected over 15% from the top. Gold, Silver, Copper, Wheat and other commodities too have retreated from their respective highs. The heavy selling witnessed in last few days, has raised concerns that the air is leaking from the Commodity bubble and that a multiyear bull market might end soon. It has been pretty well established of late, that the commodity market has been exhibiting many of the characteristics of a bubble. Thus, we may be very well at the beginning of a bursting asset bubble.


Historically, price bubbles have been destined to burst under their own weight, and at a moment's notice. No market travels in a straight line forever and what goes up inevitably comes down. And as the charts of the dot-com and housing bubbles show, the fall can be just as dramatic as the climb. Now, when the bubble in the commodity space is showing signs of cllapse, an analysis of various factors that inflated the same will make for an interesting study. Now, when the bubble in the commodity space is showing signs of collapse, an analysis of various factors that inflated the same will make for an interesting study.

Commodities prices have increased more in the aggregate over the last five years than at any other time in U.S. history. Commodity price spikes have occurred in the past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today, unlike previous episodes, supply is relatively ample: there are no lines at the gas pump and there is plenty of food on the shelves.

It can be said that what we are experiencing is a demand shock coming from Emerging economies like China and India . In recent years, the two countries, which together possess more than a third of the world's population, have witnessed rapid economic growth. There has been a jump in national income; consumption levels and standard of living in this part of the globe on back of heightened pace of industrialization, urbanisation and benefits of globalization. It is being suggested that this particular demand factor was something which attracted new category of participant in the commodities futures markets: Institutional Investors like Hedge Funds, Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments etc. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.

According to the US Department of Energy, annual Chinese demand for petroleum has increased in the past five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. In the same five-year period, Institutional investor's' demand for petroleum futures has increased by 848 million barrels. In other words, they have almost created another China in terms of demand. However, what was being ignored was that these economies are still not consumption/export driven. Also, the population and politics of these countries, unlike the western ones are quite price sensitive and any abnormal rise in price is met by demand destruction.

The rise in global food grain prices has also been attributed to the phenomena of “Agflation”, i.e., diversion of crops and land for biofuel cultivation. A large portion of corn is being diverted to produce ethanol which has emerged as an attractive substitute for Crude Oil. A leaked internal World Bank study suggested that biofuels have forced global food prices up by 75%.

OPEC, which accounts for 40% of total World Crude Oil production has also been blamed for the high Crude Oil and commodity prices. However, despite repeated pronouncements about an increase in shipments, OPEC appears to be losing its ability to influence the price of oil. According to Societe Générale economist Deborah White. "It is no longer within the power of OPEC to keep prices at $28 a barrel, OPEC can only set the floor, not the ceiling." On its part, OPEC has repeatedly blamed financial speculation in Crude Oil, use of Ethanol as Crude Oil substitute, weaker Dollar and “mismanaged US economy” for high Crude Oil prices.

As has been the case earlier, whenever prices of anything have gone up dramatically, people readily blame it on “speculators.” It has been suggested that the “Index Speculators” have now stockpiled, via the futures market, the equivalent of 1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve in the past five years. However, in a free and liquid market, it would be difficult for speculators to have that much influence. While speculators may have some short-term effect on prices, most investment professionals and institutions, largely discount such notions.

Globally, most of economists are now arriving at a consensus that the skyrocketing commodity prices can be best explained in terms of "Too much money chasing too few commodities". In recent times, monetary policy of US Federal Reserve has been seriously questioned and criticized. In order to arrest Subprime rout and Housing slump, the Fed slashed the Federal funds rate from 5.25% to 2% at a frenzied pace. Ben Bernanke, in a bid to put a floor under the housing and stock markets, cranked up the growth of the MZM money supply to an explosive 15.4% annual rate. As a result Dollar's value plummeted, sending commodities price to sky high. Already, due to turmoil in financial markets investors had began shifting from equity to hard asset. A combination of uncertain macroeconomic climate and growth in money supply only worked in favor of a commodity rally.

Dollar's value has special bearing on commodity space, as the chief commodity, i.e Crude Oil is priced in Dollars. "The Fed is printing money and are trying to prevent the recession, they are putting on Band Aids," commodities investment guru Jim Rogers said. Rogers added that "as long as the US central bank and the federal government keep making mistakes, you will have a longer period of slowdown, and it will be perhaps, one of the worst recessions we have had in a long time in America ." However, Ben Bernanke cannot be entirely blamed for his act as he was merely responding to the Housing Crisis (or Subprime Crisis) brought about by a low interest rate policy of his predecessor Alan Greenspan. Alan Greenspan, on his part was forced to keep interest rate low as US economy was struggling from the IT bubble burst.

Thus, to counter the ills of IT bubble burst, Greenspan slashed interest rate and thus encouraged bubble formation in US Housing sector. When the bubble in Housing sector got busted, Ben Bernanke was left with no option but to follow his predecessor's policy and led to the bubble formation in commodities. It is being suggested mildly now that IT, Housing and Commodities bubble are interlinked, with one leading to another. According to this view the recent bubbles have been largely an incidental byproduct of focus, policy and actions of Central Bankers, specifically that of US Federal Reserve.

Whatever may be the case, the effects of the abnormal run up in prices of commodities is now very much visible in the streets across the world. Price pressures across the world are reaching levels that may soon threaten economic, political and social stability. Global inflation levels have reached uncontrollable levels, food riots have broken out in Haiti , Egypt , Bangladesh , economic growth has moderated and even slowed, Equity market has been witnessing massive selloff and thousands of jobs across the world are being lost. Policymakers are themselves finding themselves in a fix as they are facing a lethal combination of high inflation and slowing growth, also referred to as “Stagflation. Thus, “Commodity Bubble” is certainly a bubble which everyone wants to be pricked!

By Salman Khan
Salmanspeaks.co.nr

Salman Khan is a Commodity Analyst working with a leading Delhi based Indian brokerage firm, Mansukh Securities and Finace Limited as Research Analyst in Commodities. He has a rich experience of tracking Energy, Precious Metals, Base Metals and Agri Complex for last 2 yeas across various International and Indian commodity bourses (NYMEX, COMEX, LME,  CBOT, SHFE, MCX and NCDEX. He is a voracious reader and a prolific writer. He is the inhouse editor of monthly journal "MAKE MORE GUIDE" published by Mansukh Securities and Finance Limited . His articles have also appeared in leadind portals like seekingalpha.com , youthejournalist.com and youcantrade.in . He also blogs regularly at his personal blog salmanspeaks.co.nr .

Salman Khan Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

syed suhail
18 Oct 10, 23:22
economics

it is actually the paper currency that has resulted in all kinds of problems. the gold or silver standard could easily prevent inflation in an economy and prevent bubbles. we must go to gold standard as a means to savee our selves. since gold is in short supply relatively to paper currency there will be no more misuse of money as it is happening now. our only savior is to return to gold and check our macro problems.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules