When markets panic, there’s no commodity more precious than cash. Prices of metals and minerals from aluminum to zinc have tumbled, even though emerging world demand is likely to remain strong. True, if the global economy sputters, that demand may slip, too. But, a bigger factor in commodities’ steep fall is the fear that European investors will have to unwind leveraged bets, causing others to try and get out first.
Gold prices show how carried away investors were. Those concerned about too-rapid economic growth and inflation bought gold to protect their savings. Investors concerned about recession, depression and social turmoil were buying gold to protect theirs. Low global interest rates encouraged both to buy with borrowed dollars, betting the US currency’s value would fall, and gold’s rise, faster than the cost of borrowing it. Gold hit a record of $1,899 an ounce earlier in September.
Other hard assets and foreign currencies benefited from the same rationale. Between February 2009 and May this year, the Reuters-Jefferies CRB index of commodity prices climbed 85 per cent as the New York Board of Trade’s US dollar index fell 16 per cent.
Now, commodity prices are falling even as the long-term outlook for demand from developing countries remains strong and the short-term outlook for the US economy is weak. The reason seems to be that Europeans, who had bet heavily on both trends, are in deep trouble. Fears that the euro zone’s credit crisis will force them to liquidate global assets have prompted other investors to take profits while they can. Others, concerned that their clients may cash out, are liquidating in advance.
Some may argue lower commodities are a good thing, since consumers can buy more of them. But, volatility is a different matter. If prices whipsaw, companies may put off investment, which could, in turn, hurt demand. Until global investors have amassed a comfortable cash stockpile and panic-selling ends, it may be best to stand well clear of hard assets as they fall.
