CommoditiesSectors: Commodities Market
Over the last two years, the global economy experienced a roller coaster ride of valuation. Brought about by irresponsible lenders and borrowers as well as excessive speculating in the market place. Until 2007, the fast and easy flow of capital inflated home prices thus spurring a construction residential and commercial construction boom worldwide. As a result, commodity prices were driven up to record prices, such as copper. However, as the construction market virtually came to a halt due to the near collapse of the financing market and the lack of certainty in the construction market, commodities began to trend lower. The global stimulus that has been undertaken by the USA, Europe and Asia has renewed the demand for commodities and increased investor appetite.
The investor appetite for commodities is based upon two defining factors in our global economic equation:
- The supply and demand of the commodities in specific construction and industrial markets
- The investor’s inflationary hedge against a weakening currency
As mentioned earlier the supply and demand of commodities is specific to key industries that compete for raw materials and companies face challenging tasks if there is not sufficient supply of a raw material used for their manufacturing process. For example the increase in solar cell development and use increased the competition for the polysilicon with the semiconductor industry. However, during the summer, as a result of increased production and reduced government subsidies, the prices of polysilcon plunged causing havoc for the polysilicon investor.
The inflationary factor, is more heavily weighted in influencing the price of commodities, especially metals, in times of uncertainty as the investor looks to hedge their weakening currency. We have seen this effect most clearly in the recent increase in the price of gold. However, other metals are good hedges as well as they maintain their value in the global market.
As inflationary fears increase we are likely to see an rise in the prices of metal commodities, but we are unlikely to see a sufficient rise across other commodities such as paper and polysilicon due to the glut currently on the market until the supply is pulled back and inventories are reduced.
