If you're wondering when the current super-cycle for commodities will slow, one place you might want to look is to OPEC. The 13-nation group accounts for roughly two-thirds of the world's oil reserves, and somewhere around 40% of global production. Ahead of its official meeting on Wednesday, OPEC ministers dismissed any possibility of hiking output, despite calls that elevated prices could exacerbate a slowing economy, particularly in the United States.
OPEC's apparent willingness to see prices sustained above $90 is due in part, to the continued weakness of the U.S. dollar. After all, OPEC crude is priced in greenbacks. So if the U.S. dollar weakens further – as it did on Monday, diving to a new low versus the euro – expect oil prices to remain where they are or climb even higher above the most recent record of $103.95 in New York.
But OPEC finds itself in a bit of a pickle. When it met last month, there was talk of curbing production to make up for a seasonal slowdown in demand. This is typical in the second quarter to prevent a hefty drop in prices. At the same time, many U.S. consumers are reducing their energy use as economic growth grinds to a near halt. So U.S.-friendly OPEC members like Saudi Arabia don’t want to be blamed for a recession. That would definitely be bad PR.
So a significant production change for OPEC looks unlikely at this point – perhaps if oil were to fall to $85 it would be a different story.
As for the other commodity everyone is talking about, and have been for some time since prices surged almost 32% in 2007 and have risen more than 15% this year, gold jumped $9.20 to $984.20 in New York on Monday, making all those nutty gold bugs look pretty wise.
The U.S. dollar, alongside rising oil prices, is again a primary culprit. Global expectations for rising inflation has also been a factor, as investors want assets that will enable them to maintain purchasing power. A fear of further interest rate cuts from the U.S. Federal Reserve has also driven people to gold. And some speculators are undoubtedly committed to seeing a four-digit price tag on a one ounce chuck of bullion.
But its worthy to note that India, the world's largest consumer of gold jewellery, saw a huge decline in imports during the first two months of 2008. There has also been an unprecedented sales slump since the end of the summer – when gold was around $650 – in places like Dubai, one of the world's primary gold markets and a favored overseas destination for Indian buyers. This festive season is typically when demand peaks. So what are they buying instead? Diamonds, for one.
But don't forget about platinum, which also rose to an all-time high of $2,245 an ounce on Monday. And silver, which climbed to its highest level since 1980. Oh, and copper, it also hit an all-time high of $3.97.
Commodity boom, super-cycle – call it what you want. The fact is that the slowing U.S. economy may for the first time fail to slow the pace of commodity prices thanks to strong demand from the rest of the world.