Hoarding ham and cornering corn
Firstly there’s evidence that there is a lot of speculation in commodity markets, with hot money having flooded into the asset class. In contrast with speculation in paper assets like shares and bonds however, if you’ve bought a million pork bellies for delivery in June, you better have a plan for getting them out to people who actually want to eat them. You can’t hoard ham for long. Secondly there’s good evidence that commodity prices are a lagging indicator of past economic growth. Goldman Sachs have looked at their own commodity index (the GSCI) over the past couple of recessions and found that once growth slows, prices fall significantly. In the 1990-91 recession the index fell by 28%, and in the 2001 recession by 37%. The slowing global growth picture is what concerns central banks the most – the recent elevated commodity prices will not prevent them from cutting rates aggressively in 2008.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.