Have Commodity Prices Now Peaked?

Despite the recent pullback in commodity prices, I do not believe that the commodities bull-run is completely out of steam just yet. Outside of speculators – some have suggested that market speculation has accounted for between 30% – 60% of the price of a barrel of crude oil – commodity prices are principally a function of supply and demand. As we all know, our supply of natural resources on this planet is limited yet the demand for these resources continues to grow – particularly in developing markets across the globe. While higher commodity prices in the face of economic weakness can force consumers to ration their utilization of certain commodities (Ex. Oil, Natural Gas, etc…), the reality is that most commodities are a basic staple for any civilized society and can only be rationed so much.

There will continue to be noise around commodity prices in light of the global recession that appears to be increasing in force along with the geopolitical risks that are associated with some commodities such as Oil. However, we believe that the “re-emergence” of emerging markets will help drive commodity prices northward in 2009. When combined with low interest rates and a weak U.S. Dollar, these rising commodity prices will bring inflation back to the forefront of economic discussions.