Is the Commodities Boom Already Over?
Crude prices have been up since the Libyan conflict began. Gold (NYSE:GLD) has surged as people look for a safe investment in a stagnant economy. But now crude, topping $100 a barrel just last week is currently sitting at $94 and change after dropping below $90 late last week. And gold (NYSE:GLD), above $1,550 just last week, dropped below $1,500 in a matter of days, and is now valued at roughly $1,506.
Both commodities began to fall immediately following the International Energy Agency’s announcement that they would be releasing 60 million barrels of oil (NYSE:USO) to alleviate shortages incurred due to Libyan supply disruptions, with the U.S. Strategic Petroleum Reserve accounting for half of those barrels. And both commodities have since begun to recover, along with U.S. markets, as Greece nears the institution of new austerity measures that should put them on the right track to recovery and avoid a debt default that would rock world markets.
The nature of commodities is inherently fickle, subject to constant fluctuation often based on relatively unrelated data. If gold, for example, tends to rise as investors grow fearful for the economy and seek a safe-haven for their money, then how does one explain gold’s gains this week as U.S. stocks boom, with all the major indices reporting gains over the last 3 days?
In the case of gold (NYSE:GLD), while it is often an indicator of fears, it is a globally traded commodity, and it’s important to remember that increasing gold prices, while they often reflect fears of inflation, could be reflecting fears in another country that is driving up global prices. For example, gold prices could be driven up by a inflationary fears in China or a faltering economy in Spain. Inflationary fears in the U.S. have actually decreased since the beginning of the year, and though the economy has been slower to recover than once expected, economic growth should pick up as the country enters its next fiscal quarter. Current predictions have oil ending the year up about 6% to $98 a barrel and gold up about 1%.
Economic activity in emerging markets should keep gold from dropping too significantly, but it’s unlikely gold will again reach its highs from earlier this year. Investors who just a week or two ago were hoping to see gold top $1,650 by year’s end should adjust their expectations lower. And while oil might still have some growth left, it’s unlikely to top $100 a barrel again this year. The IEA reserve release pushed OPEC to reconsider their decision not to increase production, which should allow big producers like Saudi Arabia to help allay shortages by increasing output.