How Central Bank Policy Impacts Asset Prices Part 4: Commodities

Through a wider looking glass, apart from Gold, commodity prices remain mostly driven by economic cycles rather than central bank actions. The correlation of Gold with Central Bank balance sheets remains the dominant theme as it grows in substance as a true global currency and a hedge against money debauchment. Since September’s coordinated easing from central banks, commodities have turned in mixed performances (-5% for oil, -3% for metals). The direct impact of monetary policy on industrial commodity prices appears very limited today (contrary to the situation during QE2 period), given the bleak global economic outlook and the absence of aggressive easing from China.

 

Via SocGen:

Gold and monetary stimulus

Gold shows some correlation with the size of balance sheets of major central banks, as it is seen as a global currency and a hedge against money debasement.



Some profit taking has lowered gold prices in the past month but current and future potential QE programmes from the Fed (QE3.5?) and the BoJ (QE9?) among others could send gold prices higher.

Gold’s safe haven status could drive prices higher if renewed tensions were to materialise.

Oil, agricultural and industrial commodities

Since September’s coordinated easing from central banks, commodities have turned in mixed performances (-5% for oil, -3% for metals).



The direct impact of monetary policy on industrial commodity prices appears very limited today (contrary to the situation during QE2 period), given the bleak global economic outlook and the absence of aggressive easing from China.



The oil price remains highly dependent on fundamental factors of global demand and supply (plus geopolitical risk). But massive liquidity injections in the economy may impact oil prices indirectly.

The strong increase in soft commodity prices in 2010-2011 began before QE2, and was driven by significant supply issues.

 

Source: SocGen