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Commodities set to shine in 2011

Global markets | Commodities set to shine in 2011 Anthony Harrington

The weather has not been kind to global wheat crops through 2010 - so wheat prices have been outperforming all other commodities. And it is not just wheat that is on the rise. By mid-January 2011, rice too was at record high prices and the stock of rice available for export to countries around the world who are net importers of rice was dwindling rapidly. While this is fine for speculators and for investors looking to diversify into alternative asset classes, it raises some serious problems of food security for many countries, not least China.

But it is not just grain crops and adverse weather that are at play in the commodities space. Hiba Yousuf, writing for CNN Money points out that commodities generally were on a roll through 2010 and most experts expect this to continue through 2011. 

Gold continues to draw extravagant predictions of $1500 an ounce as the target for 2011, despite the fact that the shiny metal began 2011 by backtracking from the low $1400s. Oil too, has a shiny future. Many pundits are starting to see oil heading towards the highs of 2008 once again. The consensus view for 2011 is $95 a barrel but some analysts are predicting prices north of $110. All this money printing by central banks has got everyone twitchy about inflation and so paper assets generally are starting to look a little risky by comparison with real assets (read commodities). That sets one fundamental plank in place for a generally upward march, albeit with some volatility, in the commodities space. Another important fact as far as precious metals is concerned is that probably under the influence of inflationary concerns, with the dollar in particular, central banks in emerging markets, seem to have rediscovered their fondness for gold.

The analyst and commentator, Henry C. K. Liu has a very interesting table where he lists central bank gold holdings as a percentage of each country’s national foreign exchange reserves. The United States is far and away the largest holder, with 6,133.5 tonnes of gold (around 73.9% of foreign exchange reserves). China holds just 1,054.1 tonnes at present, or about 1.7% of its foreign exchange reserves. However, Chinese officials have said that they intend to increase the country’s gold stocks substantially by buying judiciously and coming to the market whenever the price falls.

With gold currently constituting such a small percentage of China’s enormous foreign reserves, the vast bulk of which is held in US dollars, this puts something of a floor under the price of gold. Since October the gold price has oscillated between around $1420 and $1350, with very brief spells, measured in hours, above or below these levels.

It seems too, that China is on something of a roll, at least as far as its desire to acquire more gold at lower prices is concerned. On January 14 2011 China startled global markets by raising both its interest rate and tightening the supply of credit to the economy by raising the amount of reserves that banks have to hold. This was the first rate rise for three years by the Chinese Central Bank but it was the third hike in mandatory reserve requirements for Chinese banks in a month. According to Reuters the move to tighten policy came after “a spate of robust data that strengthened the case for tightening”. However, this was not just a touch on the brakes to slow down overheated growth. China is highly concerned about inflation. Many market watchers inside China put the unofficial inflation rate at closer to 20% than the Chinese government’s official rate of around 9%, which, if true, would give some real point to the authorities’ desire to tighten fiscal policy in order to damp down inflation.

However, any time China tightens its policy and puts the brakes on growth, it generates a not inconsiderable ripple effect on world markets. Asian stocks fell sharply on Friday 14 January, as did commodity prices. Oil tanked (briefly, one suspects), and the gold price, which had been sliding down from a spell of a few days above $1400, accelerated its fall, heading sharply back to the $1350s. The lesson for the Chinese? If you want to buy gold cheaply, crank rates up briefly.

Of course, they probably wouldn’t do this whimsically any more than car drivers stand on their brakes on clear motorway “just for fun”. The knock on effects, no pun intended, can be really serious. But what we are looking at here is a rather a nice spin off benefit for the Chinese as far as buying more gold cheaply is concerned. And grain. And oil. You have to wonder if their purchasing departments (the left hand) knows what their policy setting department (the right hand) is about to do. If they have a joined up act going, with one hand working in tandem with the other, policy tightening really will be good for business – for the purchasing side, at least.

Further reading on commodities and global markets:

Tags: agri-commodities , China , deflation , food price volatility , gold , real asset inflation , wheat
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  1. tylerm says:
    Tue Jan 25 06:08:53 GMT 2011

    wow! indeed this 2011 will kick off the inflation, and that means when the commodities get high the value of money decreases. Rising prices does not exactly sound pleasant. The advantages of rising prices, though, could possibly be just what the doctor ordered. Inflation is consistently a factor cited in "happiness" studies. The higher the inflation rate, the less happy individuals might be. A healthful dose of mild rising prices could possibly be helpful, however. It takes just a small amount of controlled inflation to keep the economic climate growing at a healthy rate.

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