Global resources and commodities are currently at market crossroads. Commodity prices have come off the boil over the past month or so but not significantly and traders have not suffered to any great degree. The near three per cent recent fall in the US Commodity Research Bureau Index has been marked by some market players as representing a line in the sand with the commodity tide now turning.
There are a couple of factors behind the recent fall in commodity prices. The US dollar has strengthened against most global currencies of late. For some time there has been an apparent market correlation between the fall in the dollar and increases in commodity prices, specifically oil.
Some commentators mention the fact that August is the month when steelworks and mills are more likely to reduce or close production. In particular, Chinese producers have closed down for the Olympics in an attempt to cut pollution.
Some market traders and strategists are also rotating out of resource companies and into long-suffering financial stocks as they call the bottom of the market in that sector and chase both yield and capital increases. Global growth worries, and increasing commodity inventories, are also prying on market minds. The US economy may still be heading for a recession, which, if it occurs, will see US demand fall further. Growth in China is tailing off. Chinese authorities are also starting to focus more on inflationary issues. The other major emerging market, India, is also witnessing a slowdown.
However, views at the front line of the commodity business is quite different.
Most commodity producers and resource companies are far more positive.
Many resource leaders believe the outlook for iron ore, oil, copper and gold is still very good. On the other hand, resource companies acknowledge that the outlook for zinc, lead and nickel is poor over the next one to two years.
Some consider, for example, the contract iron ore price could rise by as much as 20 per cent in the next round of negotiations between miners and steel manufacturers.
Nevertheless, some analysts believe that major expansions of the production from iron ore giants such as BHP Billiton and Rio Tinto, could see iron ore prices fall from current record highs. However, others consider that many of the projects currently being talked about would not be delivered on time and, with Chinese demand remaining strong, prices would rise. Also, smaller producers are currently finding it difficult to gain funding for projects due to the credit crunch. Oil has fallen off highs of around $147 per barrel to $120. Gold futures have fallen to around $900 an ounce. Gold often trades inversely to the dollar since the metal is viewed as an alternative currency, and moves in the greenback can influence demand for dollar-denominated gold. The metal often trades with oil as funds that invest in commodities often buy them as a basket and look to oil as the leader.
Not all gold experts believe the gold price will fall further. The head of the Australian unit of Barrick Gold said recently all the indicators point to the gold price remaining high. Weakness in the US economy would support the precious metal. Barrick, one of the world's biggest gold miners, has backed its bullish view on gold by moving to de-hedge its production and has been rewarded with significant increases in its margins.
Others agree, believing that the price of gold should breach $1,000 an ounce by the end of the year. Gold would continue to offer a hedge against inflation in an environment of financial market instability. Maturing gold deposits and few new discoveries were keeping supply tight, underpinning the price.
Oil prices have retracted on fears about weakening demand in the US, China and elsewhere. The monthly US Commerce Department survey showed US consumer spending, which fuels two-thirds of output, had weakened in June, while inflationary pressures accelerated. The US is the world's biggest energy user and slowing consumer spending is weighing down global oil demand projections. Commodity prices weaken during recessions.
Platinum metals have fallen by a significant amount over the last month. Poor demand outlook from the weakening auto sector has added to the weakness in platinum prices. Platinum is seeing a shift in sentiment as the auto industry suffers with stop losses coming into play.
Many resources still have solid fundamental factors underpinning prices.
However, this may not count for much if sentiment changes.
The only certainty is that volatility and volume looks like increasing.