Here, there was more volatility from 1990 to 2005 than in oil (but still a general range in which commodities traded), then run-ups in the late 2000s and early 2010s, followed by a decline back to where prices were in previous decades.

What’s driving this?

The first answer is that it almost doesn’t matter. Prices are what they are, and what we see is that they’re moving back to normal levels.

For the future, though, it does matter, and I would say that two trends were responsible for driving prices higher:

  • Financialization. Investors rather than users were buying commodities, which created a much larger and price-insensitive group of buyers. No wonder prices were bid up! This group of buyers, however, is ultimately constrained by reality, as higher prices inevitably give rise to more supply, which can explain both the run-up and the decline, especially in oil.
  • The rise of China. With today’s lower Chinese growth rate and the planned shift from construction to consumption, Chinese demand should remain lower than in the boom years—which also explains both the boom and bust in commodity prices over the past couple of decades.

Absent these one-time factors, we are probably moving back to a calmer environment for oil and commodity prices. This should help moderate both inflation and deflation, as well as enable businesses to plan better and more effectively.

What it will not do is substantially change how the economy operates, for better or worse, but simply take us back to a more stable environment—which, come to think of it, should be a force for good.

Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.

 

First « 1 2 » Next