The S&P GSCI TR index of commodity prices – which incorporates energy, agriculture, and both industrial and precious metals – has fallen by 2.2 per cent so far this year.
For John Greenwood, chief economist at Invesco, there are no short-term factors that will reverse this slide, only ones that will aggravate it.
‘Looking forward,’ he said, ‘in contrast to previous business cycle upswings it is highly unlikely that in 2013 any of the major economies will see a surge of liquidity or a sudden upswing in business activity of the kind that would be needed to generate a sustained surge in demand for commodities.’
The key pressure on commodity prices for the foreseeable future will be the emphasis on reducing debt levels across the world, Greenwood argued.
‘Balance sheet repair is inherently disinflationary or even deflationary,’ he observed. ‘Consequently as long as the major economies are in balance sheet repair mode, commodity price surges can only result from weather or supply disruptions such as we see from time to time in the agricultural complex.’
Greenwood also noted the unfavourable outlook for gold, the price of which has crumpled by 10 per cent over the past six months. He attributed this to the exodus of money from gold exchange-traded funds.
‘There are clear signs that some of the precious metal funds have been losing support as banking problems around the world are gradually resolved and inflation remains subdued,’ he remarked.