Commodities under pressure from resurgent dollar
Date: Thursday 11 Sep 2014
After a good first half, the commodities markets are beginning to take a severe hammering from a resurgent US dollar, writes IG analyst Chris Beauchamp. Combined with supply gluts across many major commodities, the outlook appears resolutely bearish.
The US dollar has soared to a year high during the third quarter, and this has seen commodity markets drop considerably.
Gold has touched levels not seen in over two months, while crude oil is in full retreat, with Brent dropping below the $100 mark for the first time since the middle of 2013.
Most commodities are priced in US dollars, meaning that the value of a commodity moves inversely to the US currency.
Correlation between the dollar and commodities has been very strong in recent weeks, with some analysts reporting a correlation of 0.88 between the two assets.
The supply situation is also having a bearing on prices around the globe.
Major mining firms such as Rio Tinto and BHP Billiton continue ramp up output of such products as iron ore and copper, despite flagging demand in emerging markets, leading to a situation where producers are not able to command higher prices due to the abundance of supply on hand.
The same has held true in the oil market, where the US Energy Information Administration has said that it expects US crude output to hit a 45-year high in 2015.
Saudi Arabia cut production in August, in a bid to provide some support to the oil price, and other OPEC nations are likely to follow suit.
Gold and silver prices were being supported by the crisis in Ukraine, but the recent ceasefire in that region has removed a key prop to precious metals, and the reaction has been swift and predictable.
Gold is now pushing back towards $1240, while silver is heading towards key support at $18.75.
Fundamentally, these declines send a clear signal - the market does not think that global growth is proceeding at full speed.
Outside of the UK and the US, where growth is still looking strong, the eurozone, Japan and emerging markets are struggling.
Japanese GDP contracted by even more than expected in the second quarter, while the ECB has moved towards QE in a bid to restart the stuttering economy of the eurozone.
Chinese growth is not likely to hit the government's target, despite Beijing's protestations to the contrary, and Russia is suffering the impact of Western sanctions.
The commodity cycle of the past 18 months appears to have run its course for now.
Unless the global economy sees significant improvement in coming months, commodities will continue to be under pressure for the remainder of the year.
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