If you’ve been looking for an honest assessment of the recent commodity rally look no further than this bit of research by the BOJ. They provide a broad overview of the factors that are currently impacting commodity prices and conclude with a practical and fact based argument – global central banks, the financialization of commodity markets and supply/demand mechanics are all working in tandem to cause a perfect storm in commodity prices. They write:
“While the strong increase in commodity prices has been driven by global economic growth propelled by emerging economies, speculative investment flows into commodity markets have amplified the intensity of the price surge. The dynamics of global commodity prices has been changing as well, in accordance with the growing presence of financial investors in commodity markets. The entry of new financial investors has paved the way for the “financialization of commodities”. Consequently, global commodity markets have become more sensitive to portfolio rebalancing by financial investors, which has made commodity markets more correlated with other asset markets, including major equity markets. Furthermore, globally accommodative monetary conditions have played an important role in the surge in commodity prices, both by stimulating physical demand for commodities and driving more investment flows into financialized commodity markets.”
Unlike the SF Fed, which just yesterday absolved the Fed of any impact on commodity prices (in fact said QE2 was exerting downward pressure on commodity prices), the BOJ performs multidimensional & unbiased research that finds the Fed and global central banks are having a dramatic impact on commodity prices. Of course, they’re not entirely to blame, but these unbiased findings put a very serious hole in the persistent Fed talk that attempts to distance them from the commodity price increases. In my opinion, this is the most precise and accurate conclusion I have seen with regards to this subject.