New York: During the first six months of 2008, commodities looked to be the savior of investors who were losing money in the stock market. In the second half, particularly for those who had invested in oil, futures contracts were their undoing.
At the start of 2009, commodities have little appeal. Most analysts expect prices to remain under pressure as worldwide demand continues to wane for basic materials of all kinds.
“For commodities to do well, they need demand and they need present demand,” said Matt Zeman, head trader at LaSalle Futures in Chicago. “Until we see the physical demand picking up, we’re going to have a hard time moving forward.”
Still, analysts expect the futures markets to escape the sharp price swings they saw in 2008. Prices might not move much higher, but analysts predict the market will be more stable, which means what consumers pay for staples like gas and food won’t increase much either.
Commodities soared in 2008 including oil reaching a once-unthinkable $147.27 a barrel in July and gold shooting up to a record $1,033.90 an ounce in March on a wave of unprecedented global growth, especially the booming economies in China and India. Meanwhile, the dollar fell considerably against other major currencies, making commodities all the more attractive as a hedge against the weaker greenback.
The volatility on Wall Street during the first half of the year also raised commodities’ profile, as hedge funds and other big investors poured into the futures markets hoping to grab hold of some big returns. But a large part of the buying, especially in the oil markets, was fed by speculators who believed demand would only soar.
Prices began to skid as it became clear the US economy was weakening rapidly a trend exacerbated by the paralysis in the credit markets after the collapse of Lehman Brothers Holdings Inc. in September. Crude’s plunge was the most dramatic, with a barrel dropping to $35 in late December, but the chaos in the market was evident in other commodities:
After setting its record March 17, gold dropped more than $300 an ounce to just under $705 in mid-November. The metal’s path was a broken one, as investors were alternately attracted by its reputation for holding its value and turned away by commodities’ tarnished image. At year’s end, it was trading at about $875.
Wheat topped $12.70 a bushel in March, lifted in part by bad weather in several growing areas, but also on the belief that demand would increase in a wealthier global economy. By the end of the year, wheat was trading in the $5 range.
Copper rode expectations of rising demand in China to a record of $4.22 a pound in early July. At year’s end, battered by the recession, it was trading under $1.30.
At first, the drop in commodities was seen as beneficial for economies; with prices cheaper, demand might come back. But as the huge decline continued, the lower prices were worrisome in and of themselves as indicators of just how weak the global economy is.
There are a number of variables that make it hard for analysts to predict much about the commodities market in 2009.
One is what will happen to interest rates in other countries, and in turn, the dollar. The Federal Reserve has sent US rates about as low as they can go, earlier this month cutting the benchmark federal funds rate to a range of zero to 0.25%. Lower interest rates can spur economic activity, as cheaper borrowing costs give consumers more money in their pockets to spend. But lower rates can weigh on currencies as investors seek higher returns elsewhere.
It’s not known whether central banks across Europe and Asia will also slash interest rates, further undermining their own currencies, and potentially giving the greenback a boost. If their rates are stable, the dollar could weaken, and commodities might get a lift.
There’s also uncertainty about inflation, which can rise in an environment of low borrowing costs. That could benefit commodities.
Gold is perhaps the biggest beneficiary in times of inflation and stock market volatility; the belief is that gold has more potential to advance than other investments. Jon Nadler, senior analyst at Kitco Bullion Dealers Montreal, expects gold prices to trade within a range of $630 to $980 an ounce next year, with average prices hovering around $810.
One factor that stands in the way of another commodities boom in the new year is that investors, having been so badly burned by the plunge in prices during 2008, are unlikely to flood back into the market. It’s true that signs of an improving global economy should give the futures markets back some of their strength, but the billions of dollars lost as speculative buyers fled the market have left many investors chastened.
But that will mean markets that are more orderly, perhaps even more sensible, which should help consumers and the overall economy.
US consumers have already seen how plunging oil prices have affected what they pay at the pump.
Food prices are likely to take longer to come down. While the prices for wheat, corn and other grains have declined, and the gasoline used to transport food is cheaper, meat prices are likely to remain high because farmers have thinned out their herds. And, processed food like cereal has many more factors than ingredients that determine how much they cost labor, packaging and marketing all figure into the mix.