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Why commodity prices are falling ?

Commodity prices are suddenly started to fall, starts with Silver. I was expecting that as I told it early these weeks. But sudden rise in US$ is one of the main cause of this fall in commodity prices. As US$ rose, so margin for holding increases and this triggers more fall in the commodity prices. Everyone was surprise by sudden rise of this US$. But we all know that what goes up that must come down.  

Now what can be the cause of this increase in USD. There may be some insiders buying dollars suspecting that since QE2 is going to end so printing of moneys will stop and so there can be damage in the markets. Another may be  that statement from ECB that interest rate will not be raised  during next month!  But some experts are sure that this sudden strength in US$ is not going to stay for long.

If we compare Gold & Oil with USD during last few days then we can understand where the damages are. As USD moves completely contrary to its recent moves. Currencies like AUD is hurting much with the fall in commodity prices, as countries like Canada and Australia are big producers of raw materials.

Some are expecting doubt about China’s demand for commodities. Certainly it could dampen growth for controlling inflation but not absolute demand. Growth may reduces but not much.
We cannot forget that economic recovery, led by China was major factor in the price increase of  Oil and for metals like Copper. China accounts for nearly 40% of the global Copper consumption.
Though I don’t have the data but it will be better if we can make a comparison between the prices of  commodities like Copper and Gold with Chinese Foreign Exchange Reserve then we may get a clear picture.

Due to Oil and Food lead inflation most of the countries around the world are facing problems. Now many of these countries are even talking about sacrificing growth to control this inflation. Things are even bad for economies which are trying to come out from recession, like US, as high oil price is a threat for it. In this condition many US carry trades will unwind with the appreciation of US$, and ultimately it will cost a correction in commodity prices.

FED’s extraordinary monetary policy which has created lot of liquidity in the market is one of the main cause of this high prices in commodities.  Now FED is no way near to end this monetary policy so fall in this commodity prices are not something that can be for long-run. As FED hinted that it will continue it’s quantitative easing program until June and there will be not quick increase in rates, that means there may be possibility that new printed dollars may come into these commodity market. Obviously it can go in other areas also.  So I think that in coming weeks we may see again an upward pressure for commodity prices. What we are looking that may be some intermediate correction in their values, which are creating some opportunity to buy at lower levels. But things can be different if this surge in US$ is for long-term. What I think  US$ is going to plunge in coming days, I mean in the month of June and then the new ceiling of debt may come in US, as some are hoping so.
Commodities experts are saying that global appetite for natural resources is still robust, so it is likely to keep prices of these commodities from falling dramatically for long. But when this type of sudden damages happen it takes much time to rebuilt the confidence.



NOTE :  Please see the disclaimer below this blog.

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