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Commodities, excluding gold, are taking a big hit. The Journal of Commerce commodity index plunged 57% in May. A second Journal of Commerce Industrial Price Commodity Smoothed Price Index gives a clearer sign of supply and demand. It fell to 25.97 in May, from 60.56 in April.Looking back to 2008, commodities plunged dramatically and the index fell 56% to its lowest level since 1949. What followed was the greatest stock market crash since the Great Depression.
Other movements indicate a slowing of economic activity worldwide. China's Purchasing Manager's Index fell 53.9 from 55.7 in April. In Europe, the debt crisis there is putting a damper on demand. Philip Gottheif, of Equidex Brokerage Group said: "Raw materials may drop another 10% because the economy is on the "cusp' of deflation. A slowdown in Europe would affect China's exports. Europe is the biggest destination for Chinese exports.
To summarize, a slowdown in commodity demand signals a slowdown in economic activity. If countries like China are exporting less, they need less raw materials. That in turn puts downward pressure on prices.
We have no way of knowing if the current slide is temporary or if prices will resume an upward climb later in the year. What we do have a sell off in equity markets across the globe. The relationship between commodities prices and equity markets is one that bears watching.
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Reader Comments (Page 1 of 1)
6-01-2010 @ 9:55PM
william lindblad said...
I am not sure I follow your rationale. First and foremost, comparing today to any past events is foolhardy as this is the first time in history that just about every economy on this planet has some involvement, however remote. We are looking at something that involved at least 80% of the nations on this earth.
As stated recently, I feel that gold will reach a new peak somewhere in the 1400 troy area. I see nothing that tells me that the commodities market is going to take any major dive, in fact, it may be one of the safe havens. If everything continues on it's present course of chaos and confusion all markets are going to remain choppy and subject to rumor and any other media speculations. Plain and simple, this will be a rough ride with plenty of panic potential. We are all sitting on the edge of something that will make the depression of the 30's pale in comparison and we can all hope that the leadership of this world will come together and find some means to avert this catastrophe.
Even if they do - the future holds higher taxes and certainly inflation.
All in all, it's a dismal forecast.
I do hope that I am wrong!
6-01-2010 @ 11:07PM
Peter Van Schaik said...
"The relationship between commodities prices and equity markets is one that bears watching."
Almost a pun there, Ms. Madon, but not only are the bears watching that relationship but so are the bulls. I've been bullish on the general economic recovery but bearish on stock and commodity prices since, hmmm, maybe last November and I see no reason to change quite yet. We are in the contraction phase of a long term economic cycle so there will continue to be pressure on prices and profits. Sure, inflation is a future concern but, as for now, I welcome it. It sure beats a swift bout of major deflation for a nation, both individually and collectively, deeply in debt. http://sites.google.com/site/jpetervanschaik/