How long can commodity prices keep hitting record highs? With uncertainty continuing to sweep global equity markets there still seems to be more upside to come, especially in commodities such as gold, which are seen as a hedge against uncertainty.

James Burton, CEO of the World Gold Council, observes that ‘The gold price has continued to surge forward on the back of strong investor sentiment, reaching the $1,000 (£500) mark much quicker than even many bullish analysts had predicted. We are seeing encouraging recent trends, particularly in the investment sector, in a number of the world’s key gold markets, as investors take “flight to quality” in the face of the credit squeeze and ongoing financial turbulence.’

He adds, ‘Global events, including a falling dollar and rising inflationary fears, have combined with strong gold market fundamentals to create positive conditions for the gold price. But while the rising and volatile price has been a highly positive trend for those already holding gold, it has posed a short-term problem in regard to consumer purchases.’

Looking for security
Roland Kitson, director at Close Investments, added, ‘The price of all commodities has been rising in recent months and this latest peak in the price of gold has been driven by its reputation as a safe haven against the weak dollar and fears about the US economy going into recession. Commodities overall have been an excellent investment opportunity, although the question on investors’ minds now must be, ‘Is now the time to invest in gold?’ Our view is that commodities in general still have a long way to go in terms of growth and will remain a top performer and diversifier for investors’ portfolios.’

Edward Morse of the commodities team at Lehman Brothers, observes that ‘Commodity markets have tightened fundamentally across all three major sectors since the beginning of 2008. The question is whether the incremental tightness justifies the sharp run-up in prices to record levels that has occurred since January.’

Corrections, not declines
He argues, ‘We still expect a correction in the prices of several commodities, notably crude oil, but investors’ recent focus on longer-term bullish structural factors make it difficult to call for anything other than a pause in oil’s rise. As the summer arrives, tighter seasonal short-term fundamentals could push up oil prices once again.’ 

Morse suggests that ‘The broad-based jump in prices across commodity sectors would indicate that the market continues to digest large new commodity demand. But while fund flows have certainly contributed to the market’s rise, fundamentals on the supply side have tightened faster than demand has deteriorated. And there are no visible signs yet that demand growth has deteriorated significantly outside the US.’ 

He concludes, ‘It is clear that beyond commodity fundamentals, both a weakening dollar and fears of inflation are playing a role in commodity investments. However, the correlation between gold prices and the US headline CPI has broken down for a generation. 1980 was the last time gold prices appeared clearly to have been driven by inflation. We believe that unexpectedly tighter physical markets also help to explain both rising prices and the growth in financial flows into index funds and structured products.’