The economic and financial crisis of 2008-09 was so significant that its consequences for a very long time have been dominating markets, including those of commodities. As a result, most asset classes have moved largely in sync for most of the past year, inducing unprecedentedly high correlations between, for example, commodities on the one side and equities, bonds and the dollar on the other. Indeed, market focus has so far primarily been on one common factor: the stance of the global business cycle. For commodities, this meant that the focal point became the prospects of a recovery in the global economy and, in turn, a come-back of demand for raw materials.
The dedicated reader of our Commodities Monthly might have noticed that we chose a largely cyclical approach to the commodity markets in 2009. Thus, our commodity-price forecasts were derived to a large degree from our economists’ relatively optimistic call on global growth during the course of 2009. Therefore, we in turn had a rather bullish view on commodities, and a fair amount of our projections came rather close to capture actual price developments.
Going forward, we expect the close relationship between the global business cycle, commodity prices and other assets to decline. This looks set to happen when the global recovery matures and the world’s central banks start to withdraw liquidity from the market. The latter should also reveal whether unsustainable price movements away from fundamentals have taken place. While the commodities segment as a whole is now to the high side of fundamentals as judged from our simple long-run model of the CRB index, see Commodities: A fair-value model of the CRB index, valuation still does not appear significantly overdone (see chart).
