Money News
Commodity markets have tightened fundamentally across all three major sectors (agriculture, metals and energy) since the beginning of 2008. The question is whether the incremental tightness justifies the sharp run-up in prices (to new records) occurring since January.
In a just published note Lehman Brothers still expects a correction in the prices of several commodities, notably crude oil, but that investors' recent focus on longer-term bullish structural factors, many of which it agrees with, make it difficult to call for anything other than a pause in oil's rise. As the summer arrives, tighter seasonal short-term fundamentals could push up oil prices once again.
The investment house adds that it is tempting to posit that massive and unexpected financial flows have pushed prices well above fair market value across energy, metals, and agricultural goods. While fund flows have certainly contributed to the market's rise, perhaps to unsustainable highs, fundamentals on the supply side have tightened faster than demand has deteriorated. And there are no visible signs yet that demand growth has deteriorated significantly outside of the United States.
It is clear also that beyond commodity fundamentals, both a weakening dollar and fears of inflation are playing a role in commodity investments, as they contributed during the 1970s.
However, the correlation between gold prices and US headline CPI has broken down for a generation, with 1980 the last time gold prices appeared to be driven by inflation. The firm believes that unexpectedly tighter physical markets also help to explain both rising prices and the growth in financial flows into index funds and structured products.
14 March 2008 © Moneyextra.com
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