Weak Dollar, Strong Demand Revive Commodity Bull

Commodity prices are once again reaching record highs, supported by a weak dollar and improving global demand, whether it be speculative or not.


“At this stage, we see the market divided between two forces,” Walter De Wet, head of commodities research at Standard Chartered Bank, told CNBC on Tuesday, explaining that commodity prices are being pushed by monetary factors — notably the Federal Reserve's policy decisions — and pulled by what is happening to the real economy and inventory levels,

"We see the Chinese economy slowing… with the Indian economy slowing, even the German economy retail sales are not as performing as good as everybody expects," De Wet said.

Commodity prices typically show a negative correlation to the greenback. Gold is no exception to that ruleas the Federal Reserve is keeping its currency cheap through its second 'quantitative easing' program. However, that correlation may be broken at times, according to Eugen Weinberg, senior commodity analyst at Commerzbank.

"We will see at stages, or as we witnessed in 2008, and over the recent months, some times, where the dollar and the commodity prices are moving in tandem to the upside due to, for instance, high risk aversion,” Weinberg told CNBC.

“It’s not a big run off right now (for gold), it’s probably more due to the dollar weakness rather than to the gold strength,” Weinberg said.

Debt problems in Europe and low interest rates are also driving gold prices up, Weinberg said, and he now expects “the first interest rate increases in the third quarter of 2012.”

“The dollar/euro relationship is now the most important driver behind the gold prices, rather than inflation, rather than the concerns about mining production or anything else,” Weinberg said. “I think that in the longer term, that will definitely help the gold price. So some might prefer right now… to jump in before the others come in the third and the fourth quarter.”

But monetary policy is not the only driver putting upwards pressure on commodity price. For some of them, especially precious metals, demand is rising.

“There’s obviously a lot of speculators’ activity in the markets, and I think it does influence prices. But that is… only short term,” De Wet said. Commodities Futures Trading Commission data suggests that in some metals, such as platinum and palladium, almost 70 percent of investor interest was speculative, he added.

Other raw material commodities are less subject to this phenomenon.

“If you go to something like crude oil or copper for example, it’s a lot less, it’s only 10 percent, even less,” De Wet said. “It does go down to fundamentals, because ultimately, there needs to be a consumer for these commodities.”

Demand in Asia will also drive gold prices up, according to De Wet. “(Gold) is a safe haven… it is also a liquidity pledge, but there is also a real demand on the ground” he said, “as a bank, we monitor physical demand, especially out of Asia, India, China, South-East Asia, on a daily basis, and there is demand, a very, very strong demand, which we don’t see necessarily as a speculative demand.”