History provides few clues to Feds commodity price impact

Amid the endless speculation over when the Fed will finally raise interest rates, Janet Yellen, the Fed chair appears almost certain to raise rates when the policy-setting Federal Open Markets Committee next meets on 16 December. The impact on every other asset has also been pored over for months with previous examples of rate hikes scrutinised for clues as to what could happen.

In theory at last tighter monetary policy increases the cost of storing commodities and thereby decreases the demand to hold them, acts as a disincentive to invest in risky assets, encourages commodity extraction by increasing the value of monetising undeveloped commodity resources and finally by being transmitted into a stronger US dollar. All of which should mean lower commodity prices.

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Copper and gold prices most vulnerable to further falls on China

Analysis of the price sensitivity of over 100 assets to changes in the Chinese economy by Barclays has revealed that gold and perhaps surprisingly given recent sharp falls, copper also are the two commodities most vulnerable to further price falls in the event of a further sharp slowdown in China. Both metals are closely linked to the strength of the Chinese economy, in the case of copper through growth in the manufacturing and construction sectors and for gold, demand from households as a store of value. The research found that given the two metals sensitivity to Chinese economic activity, both metals are particularly vulnerable to further price falls if Chinese growth hits the buffers.

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Copper and oil prices: Lower for a bit longer?

According to Barclays the extent of the current down-cycle in oil and copper prices matches previous past experience, however any significant move up in prices from current levels might be premature and difficult to sustain, at least in the short term. In previous cycles both oil and copper have spent far longer trading at depressed levels than they have so far this time around.

Relative to their rolling five-year averages, monthly prices in September were down by 31% and 51% respectively for copper and oil. That compares with an average maximum decline of 36% for copper and 45% for oil relative to five-year averages during each of the last three major economic downturns of the past 35 years (the 1980s global economic slump, the late 1990s Asian economic crisis and the 2008 financial crisis). Bear in mind that this research was published in late October so it doesn’t capture the recent weakness in copper prices.

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