Commodities prices have seen a sharp decline in the second half of this year. The price of crude oil has dropped below $80 a barrel and is hovering around four-year lows. Platinum, copper and silver are all trading sharply lower as well since June. The Bloomberg commodity index is down 15%.
Increased supply and slowing global demand is pushing down prices. The slowing Chinese economy in particular is weakening commodities because demand for everything from corn to cotton to copper is down.
But Doug Ramsey, Chief Investment Officer at the Leuthold Group, which manages more than $1.6 billion in assets, says this is more of a supply issue. He says, "what’s been overlooked over the last three and a half years has been the supply build up, not so much the demand slowing.
"Spending just ramped up so rapidly during the recovery... it is more of a supply side argument than a demand slowing." So are we near a bottom? Ramsey says don't look for further steep declines in most commodities prices except maybe in gold. "Gold is still in the process of unwinding the craze that it enjoyed from 2000 to 2011," he says. "It was the commodity that got the public enamored and went up and topped over $1900, and that whole process of deflating that excitement that built up over 11 years is still in process."
The Leuthold Group sees another 30% decline in gold over the next three to four years. Ramsey predicts by then gold will be trading in the $700 range.
Sinking commodity prices are helping the U.S. economy right now. Lower oil prices have translated into lower gas prices, and that's putting more money in the pockets of consumers. Retail sales were up in October indicating Americans are willing to spend, but the trend may not be long-lived. Wages are up just 2% this year.
At the same time, Japan has slipped into a recession, and Europe is at risk of doing so. The trend in sliding commodity prices could help push Europe into a deflationary environment. Deflation can hurt an economy by spurring a delay in spending if consumers assume that prices will be lower in the future. According to the New York Times, about 25 percent of all U.S. exports in the first nine months of the year went to Europe and Japan. Challenges facing those economies could translate into challenges for the U.S. economy.
So are any commodities poised for a rebound? Ramsey says grains "could have a pretty good bounce." He also points to copper, because the metal has sold off so hard over the past few years, there is a good possibility of a four- to six-month pop in copper, in his view.