As oil prices soar there is the temptation to seek an explanation in Middle East turmoil. However, the prices of many other raw materials also have gained. What has triggered those changes?
Clearly, the commodities market is affected by a lot more than events that could be called "geopolitical." The widespread increase in valuations has led to talk of a "supercycle." Copper, lead, soybeans, wheat, coffee, cocoa, and feeder cattle all have registered double-digit percentage increases. Some have declined from their peaks, but still the gains have been spectacular.
Some of the surge can be traced back to the climb in the price of oil. The planned substitution of ethanol (which is derived from corn) for regular gasoline, encouraged extra corn planting that took away acreage from crops like soybeans, and that led to a cascade in prices. Thus, current high prices for livestock can be attributed in large measure to more expensive feeder grains.
Of transcendent significance in the broad strength of commodity prices is the appeal of that sector as an "alternative asset." Ever since the collapse of the speculative boom in high-tech stocks, many have been keen to diversify away from common stocks into hedge funds, private equity investments, and to a wide range of exchange-traded funds based on commodities. That, in turn, made commodities an asset class accessible to a much wider range of investors. To help in that process, large firms have hired commodity experts for additional guidance.
The recent credit crunch undoubtedly gave commodities a further lift. Those who heretofore had been willing to place capital into risky credit ventures, now are looking for something different. Then too, commodities such as gold are seen as a shield against the declining U.S. dollar.
Some believe commodities would rise if economic growth were once again to become strong, entailing greater demand for commodities. Others argue. too. that if the economy stagnated, commodities would be a good alternative to common stocks whose corporate profits would decline. The latter looks like weak reasoning.
There are two factors existing here. Supply is tight with newly developed lands now being big consumers of most commodities. Also, the other major influence is the currency debasement underway as the United States is increasing its money supply excessively.
Hence, people seem to want "things" rather than paper currency of common stocks so denominated.
In any event, commodities are gaining favour as an alternative asset.