We’re all familiar with the line, “All that glitters is not gold.” But J.R.R. Tolkien in his trilogy, Lord of the Rings (The Fellowship of the Ring) put it a different way. He wrote that “All that is gold does not glitter.”
The last few years have proven Tolkien to be right. Gold has seen its days of glory wilting like the petals of a rose. Gone are the days when gold bullions were coveted as precious possessions. And those gold earrings that were always priced way above your pocket are no longer the dreams of only the wealthy.
Gold today is affordable. The drop in the price of gold seems unstoppable and where it will settle is anybody’s guess.
And it isn’t only gold. The entire commodity sector is in a tailspin and has fallen 17 percent the last three months and an unprecedented 42 percent in the past two years.
Gold and oil prices have taken a particularly hard beating.
Gold prices ended the month of July down roughly 6.7% at approximately $1095 an ounce. The precious metal, which failed to pick up throughout the Grexit crisis, has been falling out of favor for some time now and the fluctuations in the price of gold have resulted in an increase in the amount of gold futures trading.
Higher gold prices directly affect world currencies as there is a significant correlation between gold prices and currency values especially with the currencies of major gold-producing countries such as Canada, South Africa and Australia.
Oil Prices
When it comes to oil, the picture doesn’t look much healthier. The Wall Street Journal reported recently that benchmark U.S. oil futures for September delivery was nearing the six-year low hit in March and contracts for delivery in later years were taking an even bigger hit, with prices for 2016 and 2017 already trading below their March lows. Analysts take this as an indication that investors, traders and oil companies see the global glut of crude oil continuing beyond 2015.
These companies rely on the prices of future contracts years in advance before making long-term investment decisions. Oil producers trade futures and options contracts ahead of time to lock in prices for the product they plan to sell down the road.
U.S. shale companies have shifted the weight of oil production away from the Middle East and several U.S. shale-oil producers are certain they can profitably increase production if prices rise above $65 a barrel. But the way things are going, even this price seems way above reach. Last Friday, front-month oil prices fell 79 cents, or 1.8%, to $43.87 a barrel, while futures for delivery in December 2016 settled at $51.88 a barrel. The most expensive benchmark oil-futures contracts, dated for delivery in 2022 and 2023, settled at $63.26 a barrel.
Gold and oil are not the only commodities feeling the financial pinch, with many others down double-digit percentages for the year. Platinum, lumber, coffee, sugar, wheat, oats and lean hogs have been hit hard as supply-and-demand play havoc with these sectors. Silver futures for September delivery have slumped 0.61% to $14.730 a troy ounce and copper for September delivery dropped 0.10% to $2.322 a pound.
Why is this happening?
Analysts point to several factors for why the commodity index is dropping so far and so quickly. Most important is the fact that the U.S. dollar has risen nearly 8 percent this year against a basket of major currencies and has strengthened even more these last three months. A strong dollar isn’t good for commodities, as it means that it takes fewer dollars to buy the same amount of a given fixed asset.
The other major factor in the fall of commodities is that both investors and analysts seem to have read their cards all wrong. Many investors purchased commodities in the past because they believed they would offer protection from what they anticipated would be a rise in inflation. But the Fed ended its quantitative easing program a while ago and has yet to raise interest rates causing the commodities bubble to burst.
Disappointment in China
Expectations of continued growth and productivity in China have proven incorrect and investors who depended on this country for investment glory are wondering how Beijing will come out of its economic doldrums. Last week, copper prices dropped 2.3 cents, or 1.31%, the sixth consecutive weekly loss, amid growing concerns over the health of China's economy. The Asian nation is the world’s largest copper consumer, accounting for almost 40% of world consumption last year.
All this negative news has many commodity traders wondering if they should have kept their money in stocks where the bull market has been in force for over six years now.
