Raw materials are one of the cornerstones of the global economy. They are essential for supplying construction projects, vehicles and households with resources and food. It is therefore not surprising that commodity price fluctuations reflect the current dynamics of key industries and provide essential information about the overall health of the global economy. This includes relevant information on sentiment and inflation trends, which often cause or confirm cyclical turning points.
This is why the recent surge in prices of certain commodities, such as cocoa, sugar and live livestock, has attracted the attention of economists and investors. Are these price increases a warning sign? Do these raw materials herald a re-acceleration of economic activity and inflation in the months to come?
Commodities near or at all-time highs
In our opinion, there is no reason to over-interpret the movements of certain commodities. They often reflect idiosyncratic factors associated with these particular markets, including weather conditions or disruptions among major producers, rather than major macroeconomic movements. On the contrary, overall commodity prices appear to support the favorable macroeconomic view of a “soft landing” accompanied by further moderation in inflation. Three factors support this position.
First, broader commodity prices are still significantly below their recent peak in May 2022, which appears to call into question the idea of a re-acceleration of the global economy or a recovery of inflation. This also results in a more pronounced correction in highly cyclical commodities, such as energy, base metals and construction-related materials. In the energy sector, Brent crude oil prices, while still above pre-pandemic levels, are down 27.7% from their recent peak. Looking at base metals and building materials, copper and lumber prices, which are important indicators of activity in China and the United States, also fell significantly by compared to their recent highs. This price development suggests that the global growth outlook is still dominated by headwinds and that inflationary pressures are unlikely to intensify again.
Breaking down commodity dynamics from price highs.
On the other hand, precious metals also reflect the weakness of the global economy. Gold prices have reached all-time highs, increasing 25% since June 2022 to nearly $2,300/troy oz. However, prices of silver, which is a key input for the new economy (clean technology and energy), are significantly below their recent highs. A rising gold-silver ratio amid strong gold performance is a sign that deflationary pressures are building without pressure from overall demand or economic activity.
Finally, the combination of high gold prices and flat or lower 10-year U.S. Treasury yields in recent quarters suggests that investors are now more willing to believe that uncertainty has increased and the outlook global growth is limited. While gold appears to have dissociated itself from inflationary trends since the pandemic, it remains a traditional safe haven to hold in times of uncertainty and negative macroeconomic developments. Increased demand for safe havens in macroeconomic asset classes tends to correlate with periods of slowing growth and inflation.
Overall, the idiosyncratic movements of certain commodities do not reflect the overall macroeconomic message of the segment as an asset class. The most macroeconomically sensitive components of the commodities complex are sending a signal of slowing growth and moderating inflation, consistent with the prevailing idea of a “soft landing.”
