Gold and silver have been two key winners from the ongoing worries over the U.S. debt ceiling, but so have other commodities, leading to talk that the entire asset space is showing safe haven characteristics.
One economist, though, warns that this is not the case and predicts losses if U.S. debt is downgraded or America defaults.
“With the exception of precious metals, we still think that commodity prices will fall sharply in the event of an actual U.S. downgrade or default,” Julian Jessop, chief international economist at Capital Economics, said in a research note.
Commodities have risen since Standard & Poor's put the U.S. on watch for a possible downgrade, but Jessop said not to read too much into those moves.
“We would be wary of interpreting such small moves as evidence of strong safe haven demand," he said. "Crucially, other asset prices have been relatively stable over this period, with U.S. equities and government bonds little changed and the dollar down only 2 percent or so on a trade-weighted basis.”
In Jessop's view, commodities are trading in line with equities and will continue to do so.
“The prices of industrial metals in particular remain as closely tied as ever to equity prices. Correspondingly, if equities fall in response to a U.S. downgrade or default, as they surely would, industrial metals prices should drop back too,” he said.
Capital Economics is predicting the S&P 500 will end the year at 1,200, falling 10 percent from its current levels.
That would mean bigger losses for commodities, according to Jessop.
“This would be consistent with a drop of at least 20 percent in the prices of industrial metals. In the case of copper, this would imply a price target of no more than 8,000 dollars per tonne, which happens to be our end-year forecast too,” he said.
Gold and silver could be major beneficaries of a downgrade of U.S. debt as investors search for tangible assets, Jessop said, but he can't make the same case for other commodities.
“While this is a compelling argument in favor of gold, and perhaps silver, it makes much less sense for other commodities," he said.
"The likes of oil and copper have much lower value-to-volume ratios and are harder to store. Demand for industrial commodities is also, of course, much more dependent on the underlying levels of economic activity." All of that said, Jessop pointed out that there is a chance that a downgrade of U.S. debt —and a presumed weakening of the dollar — could benefit commodity prices.
“Commodity prices might also benefit from some of the fallout from a U.S. government debt crisis, which could include continued dollar weakness and additional quantitative easing from the Fed," Jessop said.