Friday, 6 May 2011

Demand worries

Commodities market traders behave a bit like sheep - when one runs away, they all do. On Thursday last week, they all fled in droves from commodities. Was this important?

Well, maybe. Initially this looked like an irrational blip - the FT certainly thought so.  The sharpest fall was in silver, largely due to higher cash margin requirements, and it dragged down the rest of the precious metals market. Other commodities fell on short-term panic about possible losses on futures ahead of expected poor world economic growth figures. Now they've got the figures, they aren't panicking any more. The long-term trend is still up. I therefore expect prices in all commodities to rise again shortly. 

Sadly that means this drop will have little or no effect on inflation, and I still think Bernanke will go ahead with QE3. Expect more inflation misery to come.

However, I think this incident is a pointer towards an underlying issue with the way in which the world economy is being managed at the moment. The clear message from this blip for me is that the markets are beginning to worry about falling demand in the world economy.  You don't stimulate demand by fiscal and monetary tightening, as most governments are doing at the moment. It's the wrong medicine.

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