For the financial markets, the big news early in the second quarter was the collapse of gold, which was down 15% in just two days. But other commodities may hold the key to the future for the global economy over the next decade.
Going back to the pre-financial crisis world in the middle of the last decade, conventional wisdom held that the blossoming of emerging markets would spawn a surge in demand for commodities across the board. Everything from copper to oil to iron ore would build a modern infrastructure for much of the developing world.
Despite the dubious long-term historical performance of most commodities, the logic behind this theory has appeared sound. After all, the supply of natural resources is finite, and as anyone from Jeremy Grantham to Peter Schiff will tell you, there are a host of factors that could spark demand.
The financial crisis prompted demand for most commodities to swoon in late 2008 and 2009. Gasoline briefly fell below $2 a gallon.
It didn’t last long. Fiscal stimulus and loose monetary policy triggered a wave of speculative buying, and financial assets and commodities initially surged in price.
So far, however, financial assets have held up much better than real assets. In defending quantitative easing, Federal Reserve Board Chairman Ben Bernanke said he has observed no real negative consequences stemming from his monetary policy. Presumably, he’s talking about the policy’s effect on commodity prices, not equity prices.
Shale fracturing could upset the balance of power in the energy markets, enabling consumers to substitute gas for oil and other sources. The spillover ramifications for other commodity markets are likely to be far-reaching. Only a few of these outcomes are clear today (you can kiss coal good night).
But at some point, the emerging world development is no longer sustainable. China was at one time building a city the size of Houston every six weeks. But the huge Chinese expenditures on infrastructure are slowing down, according to Margie Patel, the managing director and senior portfolio manager at Wells Capital Management.
If the future for copper is as bright as everyone thought two years ago, why are copper producers such as Freeport-McMoRan trying to get back into oil, Patel asks. Eventually, emerging markets’ consumption of some commodities could start to look more like that of the developed world.
Should that occur and should America and Canada emerge as petrostates, all the rules of the game will change. The U.S. trade deficit could even morph into a surplus. Russia and the Middle East could still sell oil and gas to Europe and China, but at what price?