Bursting the commodity price bubble
The oil price has taken a tumble this week, falling from nearly $126 a barrel at the end of last week to around $106 as I type this.
The fall in price represents the biggest commodity sell-off in recent history and comes with commentary that it could be a sign the commodity bubble has burst.
Oil has not been the only casualty of this sell-off. Industrial metals, such as copper, and some foodstuffs have also seen dramatic falls in price.
So what is prompting this sell-off?
A recent slew of weak market data has certainly reduced market confidence, although this alone does not appear to explain the sudden and quite pronounced fall in commodity prices.
The events have been described as a “watershed moment” by Jeremy Batstone-Carr from Charles Stanley Stockbrokers. He describes how the commodity price bubble has been inflated by the level of speculation in these markets.
Based on that description, what we have seen in the commodity markets over the past few days might be simply a market correction, with speculators seeking to lock-in their recent profits, rather than the bubble bursting.
Leaving aside the role of speculators, lower commodity prices could reflect weaker expectations for global economic growth in the future.
Investors are likely to have an indirect exposure to commodity prices within their equity portfolios, as around a third of the FTSE 100 is exposed to commodity and mining stocks. It is for this reason that we rarely recommend additional specific exposure in the commodity asset class, as for most investors this would result in overexposure.
It will be interesting to watch the markets over the coming days and weeks to see to what extent confidence has been dented following this sell-off. The events of this week have certainly taken the shine off the arguments for perpetual growth from gold bugs and oil speculators.
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