Shift towards hard assets: Financialisation of commodities

Major credit crisis and reeling dollar are major causes of this movement.


Shan Saeed May 23, 2011



Many economists fear that the commodities market has been slowly “financialised” (that is, made to look like the equity and bond markets), and that this has allowed excessive amounts of money to pour into commodities futures.


And they fear that in a slowing global economy hit by a major credit crisis and reeling from a falling dollar, it is likely that money flows seeking safe haven in hard assets is the key driver of recent volatility.

Recent global financial market turmoil has provided investors to look for alternative investment avenues to make profits. Surge in commodities has started a new debate about impact of higher commodities prices on the global economy. Recovery looks questionable at this point in the advance economies especially in the US. The US recovery is a mirage, financed by government borrowing and spending

Borrowing has fuelled the supposed economic rebound. Now the USgovernment is backed up into a corner, facing a debt ceiling but with no clear way to make the economy grow without taking on even more debt

That means commodities will rise in price as investors dump their dollars anew

The commodity market has become a classy asset for investors to increase their earnings yield as they navigate through turbulent times. The commodity market for the last eight years has continued to witness a surge and will probably stay on this path for the next five to 10 years. Most investors want to have commodities in their investment portfolio as part of their diversification strategy to weather the financial storm. Lately, commodities have taken a pullback due to change in the geo-political and geo-economic front after Osama’s death. However big cycles travel in patterns of 15 years to 20 years. Like commodities in the 1970s or stocks in the 1980s and 1990s. Riding those bull moves is how you make money. Based on this premise, the commodity bull market has another five to 10 years left but it’s overdue for correction. The recent weakness is a part of this correction.

After 12 May 2011, it’s an interesting month to focus on; I expect gold and silver to consolidate before taking a pullback. But the commodities pullback shouldn’t be feared. It should be welcomed. It is a buying opportunity for potential financial players in the market to enter and take long positions. According to former GOP presidential candidate and Forbes Magazine Publisher Steve Forbes:

“A return to the gold standard by the US within the next five years now seems likely, because that move would help the nation solve a variety of economic, fiscal, and monetary ills ... If the dollar was as good as gold, other countries would want to buy it.”

Many people have probably no idea that there is something wrong with the dollar and you cannot just trash your money without repercussions. But the shift is happening. Big financial investors are taking positions in the commodities market. Financial investors include governments [Central Banks], commercial banks, hedge funds, pension funds, private equity group, sovereign wealth funds, and big players/financial investors like Jim Rogers, Marc Faber, George Soros, Paulson, Chris Weber, and Bill Gross among others.

Frequently today investors rely on economically established perceptions that fail time and again, simply because the conditions in which they were established have changed. One of the economic clichés is that exchange rates will rise if interest rates rise. You can be sure that if there was still a Spanish Peseta or Greek Drachma and they were paying the sort of interest rates their sovereign bonds were paying now, these currencies would still be falling, why? Many investors strongly feel that if interest rates rise, gold would automatically fall. But is that going to be true?

We will take a look at that in the concluding part of this article.

The writer is an economist and graduate of the University of Chicago, Booth School of Business

Published in The Express Tribune, May 23rd, 2011.

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