Sudip Bandyopadhyay’s Blog

Oil at $68 per barrel has more than doubled in price since December. Gold is again touching $1,000 per ounce. The Cassandras of the economic gloom &  doom warn that the monster of high energy prices will munch green shoots in the bud, but worry is misplaced. The current price movements signal not a repeat of last year’s anomalies, but a return to normality. Commodities of all stripes have taken part in the latest rally. Aside from oil and gold, spot prices of other precious metals, of industrial metals such as copper and aluminum, and of agricultural commodities, have all gone up.

The dollar’s weakening has helped. Measured in euros, oil’s rise in the past month has been about 22 per cent rather than the 30 per cent increase in the dollar-quoted price. Beyond the accounting effect, reasons investors give for pulling out of dollars – the preponderance of worry shifting from deflation to inflation and a general return of risk appetite – are also reasons why commodities again look attractive to speculators. But primarily, the commodity rally is just another sign that the extreme uncertainty unleashed by the financial crisis is loosening its chokehold on economic activity.

Commodities hit the bottom as collapsing trade bloodied the world’s industrial sectors. Once markets realised at the end of March that the world was not ending, commodity spot and futures prices climbed together. Since then, the five-year oil futures price has been hovering unperturbed around $75. The latest spot price increases therefore suggest that markets now expect recovery to take hold sooner. Is this harmful? If prices continue to go up, they could trigger inflationary pressures. And significantly higher energy prices could be the final straw for many sectors already battered by the recession.

But the futures markets’ equanimity suggests we need not worry about immoderate further price rises: businesses can hedge against them. Many commodities also have supply sources that can stabilise long-term prices near today’s levels, at which, for example, oil production from shale, tar sands and coal-to-liquid technology become economically viable. Similarly, copper prices are again reaching $5,000 per tonne, where copper scrap recycling starts to thrive.