Friday, January 22, 2010

Commodity Growth Down for Two Years Says World Bank Report

I'm not at all convinced that the report from the World Bank that commodity growth will be down over the next two years because of the economic crisis and the time it will take to come out of it.

The report states that a weakened recovery will have a negative impact on the price of commodities overall, but I think that will depend upon what the particular commodity is and what country they're talking about.

For example, they use growth rates related to developing countries over the next five to seven years as one measurement, stating they'll be fortunate if their economies growth at a rate of 0.2 percent to 0.7 percent lower than they are today.

While I completely agree that the so-called recovery is largely bogus, as the jobless rate in America "unexpectedly" fell again for the third straight week. I wonder how long this will remain "unexpected" and will be acknowledged as part of the ongoing recession?

But as far as it relates to commodity prices, I think this report is flat out wrong. Why? A five-letter word: China! Very few if any of the prices of commodities is dependent on any developing country. That's ridiculous to even think on.

China's demand for raw materials, energy and food will be the primary driver of commodity prices, with India being a much smaller, but significant player in that regard.

So to connect commodity price movements with any other country than China as the focal point of commodity price increases is to make yourself irrelevant.

Andrew Burns, lead author of the report, said this about the study: "As international financial conditions tighten, firms in developing countries will face higher borrowing costs, lower levels of credit, and reduced international capital flows."

In light of that I want to reiterate what I said above: developing countries are irrelevant to the price movement of commodities. Period! At least for many years into the future. They're completely irrelevant for the next couple of years for sure.

I have no doubt that developing countries will struggle, as the report states, but that isn't what's driving commodity prices in any way, shape or form.

Of course when you get down to it and give your attention to individual commodities, this breaks down as well, as gold is a protection against inflation and a place of safety. That will drive up the price of gold, and that should happen over the next couple of years, although the timing of any price movement can't be for sure.

Anyway, just look to China first, India, and to a lesser extent certain large industries like the housing market and auto industry in the U.S. as to whether raw materials' demand is growing.

But China is by far the best indicator, and as goes China over the next couple of years, so should go the price of commodities.

Commodity Price Growth

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