I’m late to this item, which appeared in the Financial Times on Thursday, but according to Google News, was not reported elsewhere, so I thought it was still worth featuring.
The IMF warned that commodities prices include a speculative element as investors are treating it as a new asset class and a safe haven in a time of declining dollar.
One could cynically argue that the IMF is talking its book, since the rapid rise in commodities prices in the last two months is destabilizing. However, the sharp, across the board basic materials price declines in the wake of the Fed delivering a mere 75 basis point cut lends creedence to the IMF’s warning.
From the Financial Times:
The strength of commodities prices, such as crude oil, this year is explained in a large part by speculative factors such as investors piling into the new asset class and the weakness of the US dollar, the International Monetary Fund said on Thursday.
The warning came as commodities prices fell across the board, with oil prices dropping below the $100 a barrel level, gold prices tumbling 10 per cent from their recent record above $1,000 a troy ounce and sharp falls in base metals and grains…..
The IMF said that the constellation of dollar depreciation and falling short-term real interest rates “has pushed up commodity prices through a number of channels, including by enhancing the attractiveness of commodities as an alternative asset.”
“Overall, these financial factors seem to explain a large part of the increase in crude oil prices so far in 2008, as well as the rising prices of other commodities,” it said.
It added that as global economic growth is widely expected to decline this year and in 2009, “prices of most commodities should eventually start easing.” However, it added that “unless there is a substantial global downturn, however, the extent of easing may be small, given the current tight balances in some commodity markets.”
The IMF said that in all recent global downturns, commodity prices declined sharply, “suggesting a disconnect between commodity prices and the ongoing slowdown.”
However, it added that much of the apparent disconnect reflected the fact that developing countries, which have been responsible for the bulk of recent commodity demand growth, have so far been less affected by the slowing growth.
We have noted before that commodities prices are very much influenced by GDP growth in emerging markets. We expect they will slow down in the third or fourth quarter of this year, as the US slowdown take hold and starts to affect demand for imports.