View the article online at http://citywire.co.uk/money/article/a707905
Commodity comeback ‘neither feasible nor likely’
John Greenwood, chief economist at Invesco, says commodity prices will not recover from their long slump any time soon.
John Greenwood, chief economist at Invesco, the US investment group, has predicted that commodity prices will not recover from their long slump any time soon.
In the year since September 2012, the Reuters-CRB index of commodity prices – which has a bias to precious metals such as gold, silver and platinum but excludes oil – has fallen by 14%. The S&P/Goldman Sachs Spot index, which incorporates oil, has lost 8% through the same period.
Greenwood (pictured) attributed this to two factors: the weak economy and the absence of inflationary pressures worldwide.
On the first point, Greenwood highlighted the subdued global trade environment, anaemic growth in the developed world, and slowing growth rates in emerging markets.
While this economic situation is not optimal for commodity prices, Greenwood acknowledges that resources could be driven higher by the inflationary pressures engendered by quantitative easing. He viewed this as an unlikely outcome, however.
‘The commodity weakness reflects the unwinding of financial and speculative positions taken in commodity funds, positions that were often based on the mistaken notion that the solution to the global financial crisis would be found in highly inflationary policies by central banks,’ Greenwood explained.
Instead, for Greenwood the emphasis of other market participants was still firmly on deleveraging and this offset the money being printed by central banks.
‘Balance sheet repair is inherently disinflationary or even deflationary,’ he argued. ‘Consequently as long as the major economies are in balance sheet repair mode, commodity price surges can only result from local or temporary supply disruptions such as those that occur from time to time in the agricultural commodities.’
Greenwood added: ‘A broad surge in commodity prices is neither feasible nor likely.’
Invesco owns Invesco Perpetual, the investment group behind leading income fund manager Neil Woodford.
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