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the commodities boom? « Previous | |Next »
August 18, 2008

Is the commodities boom dying? The prices of gold, copper, and nickel are falling and have been for a while. So have the shares of mining companies. Does that mean China's growth easing? What happens to Australia's current account deficit if it does? If mineral exports currently account for over half of Australia's export income, then the deficit will increase. Wasn't China meant to be the security blanket for the world economy?

Spoonerminingboom.jpg Spooner

The turn around in commodity prices has been so quick, as it has happened is less than a month. Does this drop reflect the slow down in global economic growth--changes in economic fundamentals, as the economists are wont to say? Or is the lessening demand in the US for commodities (and in Europe and Japan) due to the economic slowdown there?

Or is it just a market correction, and so not something to worry about? Some argue that the big rise in commodity prices was the result of speculators fleeing from the fall in the US dollar. They are now selling commodities, hence the fall in prices. So it is a consolidation rather than a dramatically sharp cyclical downswing (a bear market).

Others argue that China is far more important to world commodity markets than the US these days, and economic growth in China is slowing. Since that has significant consequences for social stability and pulling the 700 million rural Chinese out of poverty, and so the Chinese government, to ensure its own survival, needs to keep the economy buoyant and growing. This will be done through accelerated government spending, as has happened in the past, and so China's demand for raw materials (coal and iron ore) will continue to grow. Australia's future prosperity is secured.

Trouble is the Australian dollar, the world's strongest currency in the first half this year because of its commodities link, has fallen 10 per cent against the US dollar, and is retreating even against the New Zealand dollar. Doesn't that indicate that financial markets expect a slowdown in global economic growth.

| Posted by Gary Sauer-Thompson at 8:53 AM | | Comments (1)


Like all price increases driven by speculators, the recent spike in commodity prices generally (oil included) was always unsustainable. But in the long term (i.e. over coming decades) and barring cataclysmic global events, the prices we get for commodities should rise steadily.