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Taper tiger

3 January 2014 By Kevin Allison

Commodity prices look set to distinguish themselves in 2014. From gold to grain, raw materials will trade less in line not only with equities, but with each other – and are likely to fall, to boot. Thank a calm euro zone and the prospect of the U.S. Federal Reserve cutting back its bond purchases.

Historically, commodities and equities have tended to move independently of one another. But for most of the period since the stock market’s March 2009 trough, the performance of the Thomson Reuters/Jefferies CRB commodity index has closely tracked that of the MSCI World Index of stocks.

Distortive central bank policies and euro zone fears meant investors didn’t really distinguish between the two asset classes. When stocks moved, commodity prices tended to move in the same direction, and by a similar amount.

Asset-inflating central banks did not totally overwhelm real-world supply and demand. Expensive crude oil has led to a surge in U.S. shale drilling and a glut of non-OPEC crude. A decade of pricey copper and iron ore has induced miners to bring giant new pits online, even as growth in Chinese demand for raw materials wanes.

The unusual correlations finally started to change over the summer and by early December there was little relationship to discern at all. Correlations between different commodities have also fallen.

Many raw materials prices are still high by historical standards, though. That should change if the Fed cuts its extraordinary support for the economy, as expected. In addition, the more normal monetary policy becomes, the greater the likelihood that individual commodities start trading more on their own fundamentals than anything else.

Cheaper raw materials would be a boon to industry. Consumers would welcome less expensive oil and grain. Softer metal prices would ease the impact of slower growth in China – at least until demand catches up with supply again. And commodities that no longer trade in lock-step with each other may even provide a boost to Wall Street’s struggling trading desks. Prices set by fundamentals, not fear, would be good news all round.


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