In a rare phenomenon, the prices of completely unrelated commodities are falling. Is another global recession coming?

What could possibly cause several different kinds of commodities – from oil to gold to silver – to drop at the same time?



Prices for nearly two dozen commodities – from crude oil to corn – are in the red. A major index that tracks commodities, the S&P GSCI, is down about 18% on the year and is trading at four-year lows.

It’s not a normal dip. The factors that create bounces in cotton prices usually don’t influence, say, gold. Some market watchers worry this plunge in prices may be a sign of foundational fissures, warning signs of a larger, unstable global economy that could portend future problems.

But experts say it’s not apocalypse now. It’s not even apocalypse soon.

The simple reason for the dip in commodities prices, these experts say, is that we have too much of a good thing: too much gold; a bumper crop of corn; a glut of iron ore because the big three producers, Rio Tinto, Vale and BHP Billiton have all increased output. In crude oil, members of the Organization of Petroleum Exporting Countries keep pumping out oil, while US production is at its highest level since 1986.



The US drought, which devastated farmers for years, is largely in the rearview, says Ken Morrison, editor of an online commodities newsletter, Morrison on the Markets. Now, the grain markets are choking on a bumper harvest. This year US corn and soybean farmers will likely reap a record crop. Supplies are so big that there aren’t enough buyers: corn prices are hovering just off five-year lows. On a global basis, cotton stocks have never been bigger.

Facebook Twitter Pinterest Gold is poured during a tour of Agnico-Eagle’s Meadowbank mine near Baker Lake, Nunavut. Photograph: Chris Wattie/Reuters

This embarrassment of riches is what commodity producers thought they wanted. They spent the past several years investing in infrastructure and technology to produce more goods, getting more barrels of oil, more ounces of gold or more bushels per acre, said Rob Haworth, senior investment strategist for US Bank Wealth Management.

Commodity producers pushed more in the hope that they would meet strong demand from emerging markets like China, where citizens bought homes, iPhones and cars and created booming 7% economic growth every year.



That’s not how it worked out, however. Asia and Europe are suffering from weaker economies – in some cases, flirting with new recessions in Japan and the Eurozone – which, in turn, means that demand for all of that oil and gold and iron is dropping.



“The market has to absorb both [weak demand and high supply] at the same time,” said US Bank’s Haworth. “With either one, we would have seen somewhat weaker prices; with both the market is really having to adjust.”

That lack of demand is why the commodity markets aren’t forecasting bad times in the future; they’re mirroring the current dark “mood” of the commodity investor, said analysts at Citi Research in a research note from 16 November.

“A lower oil price sets the tone for the entire commodity market and drives commodity indices ... lower, which creates a negative mood in the market,” the Citi analysts said.

Investors have lost their love affair with commodities, too. Just a few years ago, the sector was the darling of speculative investors who lusted after the more complicated financial products in commodities. These speculators snapped up futures contracts and exchange-traded funds in hopes of a rich future payoff.



Now the moneyed crowd is getting better returns in stocks, which are at record highs, said Bill O’Neill, principal at Logic Advisors, a commodities advisory firm.

Facebook Twitter Pinterest A ring made with gold and silver is seen at the Exportaciones Bolivianas jewelry manufacturer in La Paz. Photograph: David Mercado/Reuters

“Let’s face it, [stocks] are running up all over the world,” he said.

Gold is a good example of how far a market can fall when investors say goodbye.



For a brief time the biggest exchange-traded fund that was backed by physical gold, the SPDR Gold Trust held 1,353.30 metric tons in December 2012, but as of 17 November, holdings were 723.01 tons, just off a six-year low. Gold prices are near four-year lows.

Both Haworth and O’Neill said the gold market reflects the lack of inflation seen globally, even as central banks like the Bank of Japan and the European Central Bank are loosening their policies and thinking of pouring more stimulus into their economies.

One reason Haworth said he’s not worried about a bigger global recession is the behavior of copper prices. Because the red metal has many industrial uses, commodity watchers will sometimes say copper has “a PhD in economics”, and it can be a gauge of future industrial demand. US copper futures prices have dipped below $3 a pound on rare occasions in 2014, but it’s always bounced back up. Prices currently are around $3.04.

Haworth called that “heartening” and posits copper prices are suggesting that while global growth is not strong, it’s not falling apart.

“In order for me to become worried about a recession, I think we’d need to see a much bigger fall in the price of copper and that’s not happening,” Haworth said.

It does mean, however, that commodity producers – and investors – won’t be able to count their money in bushels.

