Then what’s really driving commodity prices?
If you can’t entirely blame weak commodity prices on Chinese demand, what is the culprit? Take a look at the chart below. The red line plots the 10-year rolling correlation of annual returns on the Thomson Reuters/Jefferies CRB Commodity Index (CRB) with China’s real GDP growth. The correlation between these two numbers has stayed close to 0.4 since the late 1990s.
Now take a look at the blue line, which shows a negative correlation between the CRB and the trade-weighted U.S. dollar. The correlation since 2010 has hovered around -0.8, implying that “the dollar has much more explanatory power,” says BCA.
The data confirms BCA’s “long-term suspicion that the bull market in commodities last decade was mainly a reflection of a sustained fall in the U.S. dollar.”
This isn’t the only time we’ve experienced this phenomenon. In the 1990s, when the U.S. economy was booming and the dollar was strong, commodity prices were weak and oil prices fell to an all-time low of $10 per barrel.
Today, many emerging market economies that had no global footprint a few decades ago are now growing at a much faster pace than the developed countries. These emerging nations have young, growing populations who are moving to the cities, becoming wealthier, and consuming more goods and services.
However, like I shared recently, Credit Suisse is of the opinion that prices of commodities may no longer rise and fall together in unison, emphasizing that investors will need to focus on individual commodities depending on the supply and demand factors. This is why we advocate that investors hold a diversified basket of commodities actively managed by professionals who understand these specialized assets and the global trends affecting them.