The decline in commodity prices witnessed in the latter months of last year seems to have extended to 2015. There was a slight kickback in January by some of the commodities that plunged last year, but that seems to be fading off. In fact, oil seems to be the one commodity on recovery but according to several analysts, this could just prove to be a moment and nothing more.
Generally, commodity prices are inversely linked to the strength of the U.S. dollar, which means a strong dollar would lead to low commodity prices. Now everyone knows this, but what has happened over the last several months has nothing to do with a strong dollar, at least; the majority of the decline in commodity prices can be attributed to other factors.
Dollar vs. commodities
Illustratively, the dollar has gained, on average, between 10% and 15% against major currencies over the last 8 months based on exchange rates obtained via ExchangeCurrency.Com, while the U.S. Dollar index has advanced 18.75% since April last year to trade at 95.48 points.
On the other hand, Crude Oil is down has fallen from more than $100 per barrel to $48, while Brent is currently trading at just over $60 per barrel. The VelocityShares 3x Long Crude Oil ETN (UWTI, Financial) is down from $40 to just $2.80 per share, while Ultra DJ UBS Crude Oil ProShares (UCO, Financial) is down to $8 from $40 per share.
Therefore it is clear that the price of oil has fallen by more than 50% while the associated ETFs are doing much worse.
On the other hand, the DJ Copper Index is down to $400 from $490, which represents 22.5% decline while DJ Silver Index has fallen to $320 from $420, representing 23.8% decline.
Gold price has also been on the decline falling from $1,400 to below $1,200 in late December but has this year recovered slightly to trade just above $1,200. The SPDR Gold ETFĂ‚ has fallen from $133 to about $115 during that period.
Are commodity prices telling us something?
By the look of things, it appears that there is much more going towards the decline in commodity prices than a typical strong U.S. dollar. Ideally, increased commodity prices suggest that government spending on commodities is high, or there is a lack of supply all together.
Therefore, the U.S economic growth could be deceitful to some point. After all, investors seem to be giving it a lot of credit than it already deserves, especially via the equities markets.
The SPDR S&P 500 ETF (SPY, Financial) has gained 30 points since February last year and maintains a bullish outlook for now. However, the big question is whether this could continue into the foreseeable future, given the global economic situation.
The U.S. appears to be running a show of its own while the rest of the world continues to struggle. It could be only a matter of time before the global economic pressure started affecting the U.S. economic growth.
Now, commodity prices are hugely affected by such economic slowdowns, especially when large consumers like China are affected. Therefore, the current decline in commodity prices could be a crucial warning of what is about to happen in the global financial markets, with or without a strong dollar.
