Thursday, October 22, 2009

Commodities, Copper, Even Baltic Index Suggest That Global Economic Activity is Coming Back

The Dow Jones-AIG Commodity Index (^DJC) is a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities (e.g. natural gas, live cattle, wheat, copper, silver, cotton, etc., see the full list and current weights here and see the chart above) and was launched on July 14th, 1998.

Blogging maven and fellow chartaholic Scott Grannis has been regularly graphing and reporting on commodity prices
over the last six months, particularly copper, because he says that "Commodity prices are an excellent way of keeping tabs in real time on the progress of the global economy."

Here's a chart below of the Dow-Jones AIG Commodity Index back to 2007 (in semi-log format a la Scott), showing that the commodity price index reached a one-year high yesterday, closing at the highest level since October 14, 2008.

The one-year high for the commodity price index indicates that global commerce and economic activity are rebounding from the early 2009 lows, and that a global economic recovery is well under way, especially considering the other recent positive reports on global economic activity picking up (here and here). Even the Baltic Dry Index is showing some signs of life again, closing above 3,000 today for the first time since early August.


At 10/22/2009 5:58 PM, Blogger rjmil04 said...

I love that you try and place a positive spin on things. But after reading this particular post, all I could think was "Really?!". I think your read on the rising price of commodities could be wishful thinking. The real reason that commodities prices are rising may be more likely due to the inflation hedging. The market believes that the only way to pay for all this drunken spending is through dollar printing.

At 10/22/2009 10:37 PM, Blogger KO said...

Inflation hedging is part of it, but the forward prices are so high because the real prices being paid are high. Where does the actual stuff like iron ore, copper, and cotton get used? India and China have to account for much of that and they've been growing as we and Western Europe languish. And a whole lot of cotton clothing comes from South America. And again their economies (with exceptions) are doing ok.

Someone on CNBC World said the reason the Baltic Dry index didn't keep up with the underlying commodities is that some new ships came on line this year. They take years to build and were ordered back when times were good. I haven't researched that, but he was a shipping analyst and that's why the host asked.

At 10/23/2009 10:17 AM, Anonymous morganovich said...

also keep in mind that commodities are dollar denominated. with the dollar dropping, reported prices on commodities will increase even without a change in supply/demand or in the functional price much of the world pays for them.

the dollar is off 18% vs the euro since april.

if you were buying commodities in euros, you'd be seeing much less of a price increase.

At 10/23/2009 12:11 PM, Blogger BMWright said...

Thanks, this is most interesting information.

I'd guess this has as much to do will the falling dollar as it does with an improving world economy.

Last year at this time we had a climbing dollar and falling commodities prices. We had 1.70 a gal. gas and today we have 2.60 a gal. and I doubt demand has improved by 50%. In fact demand was much higher in 2005-2006 and we had oil at around $50 BL. L.O.L. today it's $80 BL.

Hopefully this is not a sign of a return to the stagflation 70's days.

At 10/23/2009 6:38 PM, Blogger VangelV said...

From where I am standing it looks as if the USD is in a long term decline that will cause commodity prices to explode for Americans. That is not exactly cause for optimism for the American economy.

Please note that it is possible for the USD to have a nice run to the upside during a crisis as the leveraged players have to unwind their positions. If that happens we could see commodity prices fall for a bit before they resume their bull market run.

What really bothers me is the supply situation. If we get a recovery there aren't enough oil fields, plantations or mines to meet demand for energy, food and metals. And even if we were to divert savings into such investments there aren't enough resources to make many projects viable.

At 10/28/2009 6:23 AM, Anonymous Anonymous said...

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