Tower: Commodity Investing in 2009

If 2008 was the year of financial markets crises, then 2009 has shaped up to be the year of economic crisis. In response numerous governments and central banks have launched massive economic growth stimulus packages. Beneficial effects from fiscal stimulus by governments and monetary stimulus by central banks will take time to become more noticeable. In the meantime statistical reports suggest that at least the rate of economic downturn is decelerating. Quantitative easing stimuli (colloquially known as “printing money”) undertaken by key central banks such as the US Federal Reserve, the Bank of England, and the Bank of Japan are beginning to work as planned.

An early sign of economic stabilisation has been an uptick in prices for some commodities. This improvement is partly attributable to increased buying by manufacturers re-stocking unusually low goods inventory levels and China’s demand for raw material inputs into ambitious construction and infrastructure projects funded by its $US586 billion fiscal stimulus programme. Once sustainable economic growth is underway again, commodity supply bottlenecks should re-emerge. The global economic crisis has caused commodity producers to scale back, postpone, or cancel previously planned investment in expanding production capacity. Supply restrictions will eventually exert more influence on commodity price trends.

Commodities as an economic growth bellwether
Commodity prices will continue to provide important signals regarding global economic recovery. Reasons for this signalling function include:
• Prices reflect actual demand and supply for commodity inputs into the real economy wherein physical goods are produced and consumed
• The market for commodities is truly global because all economies bid for them competitively.

Apart from real economy demand and supply, commodity prices can be positively influenced by other factors such as inflation – particularly if unexpectedly high - and market shocks like labour unrest, political tensions, and outbreaks of war or disease. Market commentators have warned that central banks are creating preconditions for higher future inflation by unleashing vast expansions of money supply through quantitative easing and other emergency economic and financial market rescue plans.