Purchasing Commodities on the Dip

Brittney Barrett  |

Commodities slumped across the board today, following the announced that Chinese inflation exceeded the government’s target numbers, indicating more dramatic credit tightening in the future and consequentially a deflation demand for everything from crude oil to copper.

The Standard & Poor’s GSCI Index, consisting of 24 raw materials, sank 3.4 percent to 684 this afternoon as silver, oil, gas, coal sugar and corn all tumbled.  Gasoline slid 9 percent as the high prices led to a decline in U.S. demand for motor fuel. The oil news, which had crude under $100 a barrel was still eclipsed by corn declines, which plunged as far as the daily limit would allow when the Chicago Board of Trade revealed forecasts showing the U.S. stockpiles exceeding analyst expectations. Copper reached its weakest point since December.

Chinese inflation is closely related to the prices of commodities like raw materials because China consumes more of them than any other nation. China is responsible for the highest percentage of consumption of metals, wheat, pork and cotton. Because of the growing demand from the expanding middle class in China and the nation’s overall economic growth, consumer prices rose 5.3 percent last month from the year earlier period. This number was well beyond the government’s full-year goal for the fourth consecutive month. In an effort to quell the price growth, the central bank has been consistently boosting interest rates since October.

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Until now, the threat of population growth and the greater demand that will put on commodities from energy to food has pushed prices considerably higher.  Now fears of a slow down as China looks to slow down their own economic growth are rattling commodities markets.

The question many investors are asking is whether they should run now, as the commodity markets begin responding to the slowdown, expected to begin this summer. That really depends. China’s interest rate hikes have thus far been not wholly unsuccessful, but not been particularly effective in curbing economic growth. That being said, the middle class both in China and other nations who are consuming major percentages of basic materials, India for instance are still on their way up. Even if the commodities prices fall for a short time, greater demand for energy and food from these classes would eventually drive these prices back up. The timeline of this is of course unsure but the infrastructure for higher demand in commodities is there. Chinese people, now able to afford more expensive foods are demanding more meat. It takes 10 times the amount of corn than would be used to feed that cow to adulthood. This means that more corn will be used on a consistent basis and the price could eventually go back up in spite of the interest hikes.


Investors who aren’t interested in taking a long position may want to take note that the GSCI index slid to its an 11-week low alongside lower orders for U.S. service industries and German manufacturing today.

Analysts at Goldman caution about near-term commodities while others indicate the numbers could stay low for some time. Long-term; however, with the factors in place to produce gains, investing while the market is weak may be a good bet for those looking to get into Agriculture and Energy ETFs but feared that their best days were behind them.




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