Commodities (with the exception of precious metals) have taken a battering since the credit crunch. Are they in line for an upward spike?
The reason why commodities really suffered is that fears centred on the collapse of industrial production. If no one wants to produce anything, or drive anywhere, or heat their home, or eat then commodities should be in trouble. The problem with this is that none of this is true. It is all a question of liquidity.
The essential fact about commodities is not so much demand – at least not in the short or medium term – but supply. The long drive down of the price of commodities in the 1980s and 1990s resulted in a massive under investment in production. New mines were not opened, new land was not cultivated and oil wells were not replaced when they went dry.
This is a long term thing as it is hard to find, for example, oil on order. So if oil firms stop investing in geologists then they won’t feel the pain now, but when prices go up again then it will take seven or eight years to get the oil flowing.
So when commodity prices rose they were rising for a reason. And they fell for a reason, but the reason was temporary- a withdrawal of liquidity from the market. The liquidity is still not there, but it will get back. There are still too few investments being made, there is still a large demand as a large number of people up their living standards and the prices are looking tempting.