In this edition of Q & A with BCA, we are pleased to offer a recent question posed by long-time BCA client, Mr. X. Making his first appearance in 1962, Mr. X has visited our offices at the end of each year to discuss the outlook for economic and financial markets.
Please find below the fourth installment of a five-part series recapping our December 2012 meeting.
Mr.X Commodity prices moved in a broad range over the past year and I suppose this was not a great surprise given the competing forces of hyper-easy money but slow economic growth. Your view of continued easy money and improving growth presumably will be positive for prices in the coming year. Is that correct?
BCA Yes, we do expect a renewed uptrend in economically-sensitive commodities to reassert itself after a rather directionless year. China will be very critical to the outlook because it remains the marginal buyer of many resources. Thus, if our view on China is correct, then commodity prices should move higher. But it will be a moderate increase, not a spike, given the subdued demand outlook in the developed world.
On a positive note, many base metals prices have fallen below their long-term production costs and do not need much demand to appreciate. Oil prices have proved to be very resilient in the face of weak global growth and increased crude production in the U.S. This is consistent with solid underlying fundamentals, and supports a positive view for the coming year. Prices are no doubt benefiting from a geopolitical risk premium in prices related to ongoing tensions in the Middle East, but the odds are good that this risk premium will persist. Even if political tensions ease, stronger oil demand will be an offsetting force, keeping a floor under prices.
The biggest driver of commodities in the past couple of years has been monetary policy rather than economic growth. This shows up the outperformance of gold over metals. However, the ratio of gold to metals looks as if it is breaking down, pointing to a looming change in the underlying environment.
Stay tuned for more on this five part Q&A series with Mr. X!