Commodities stand corrected. Indices of industrial metals and agricultural prices have dropped more than 10 per cent in a matter of days, while precious metals have sold off sharply. After the impressive ramp in their prices over the preceding two months, induced by expectations of new liquidity from the Federal Reserve, a correction seems natural enough. But the threat of Chinese price controls could be more than a mere correction.
Any number of indicators show that the recent move up was less driven by physical demand than by the anticipation of liquidity. While material prices took off, the Baltic Dry index of shipping costs, which was a geared play on commodities throughout the crisis period, has sagged since the summer. But the commodities rally started as soon as Ben Bernanke, the Fed’s chairman, floated further quantitative easing at Jackson Hole in late August. After that, industrial metals gained 26 per cent and agricultural commodities as much as 40 per cent, according to Dow Jones-UBS indices.
But it is China that, at the margin, sets prices for commodities, and has driven the rally since the spring of last year. Metal prices shot up once China started to boost the money supply. They have not fallen back since China turned off the tap, because companies were left flush with enough cash to last them some number of years.