Metals disappointed investors and traders alike last week when a promising start to a bull market proved to be little more than an anomalous blip. Commodities prices, particularly gold spot, seemed to be returning to basic healthy benchmarks, encouraging capital influx, and it was hoped, fueling a return to ‘the good old days.’ After a charge up to around the $1 200 mark though, gains sputtered, and then promptly fell back to levels which make gold extraction in some regions (particularly South Africa) unviable. With demand stabilizing, and the spot price of many suffering minerals at such reasonable rates, the lack of renewed demand has left many analysts deeply confused.
This week one of the largest credit agencies in the world, Export Development Canada (EDC), came out with what it believes to be the answer – weak commodities and a strong stock market are actually signs that things are going pretty well. Chief economist Peter Hall explained that they “believe that the drop in commodity prices is more related to the return of world growth than the drop in growth,” seeing as how it is an indicator that “businesses are really plunging money into their business in a way we haven’t seen in the last 6 or 7 years,” which they predict will lead to a 7% growth in exports for 2017.
The premise is that while the famed ‘quantitative easing’ programmes introduced by various governments in the wake of 2008 were still in place and disgorging capital which had to be spent immediately, companies looked to good stores of value with long-term applications – namely commodities, both for manufacturing and investment. This has led to stockpiles, and now, with the government taps slowly being turned off, companies are using new capital to remain competitive, while also beginning to work through their commodities stockpiles and reserves. This will, in theory, lead to leaner, more efficient firms, who will be in need of more raw material soon, in turn meaning that commodities will see a strong showing in the coming years – perhaps a more gradual process than some bulls had hoped for.
For those who doubt the influence of federal stimulus programmes on the global commodities markets, simply apply the introduction and reduction dates of quantitative easing measures to a gold chart, and the correlation becomes immediately evident. Peter Hall has explained that “one of the ways we were able to see this was happening was [that] commodities, usage was low we just weren’t shipping as much of this stuff, secondly, inventories were high and rising and thirdly prices were strong,” while “extra liquidity’s been keeping commodity prices high, [so] the very moment commodity prices come down is when they start reeling in [quantitative easing].”
Though believers in commodities might be hurting for the moment, persistence and patience will likely reward them – for the moment, bad news does in fact mean long term growth and stability. As analyst Warren Bevan reminds us, “markets will do what they want on their own schedules so learning to go with the flow is very important.”
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