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Could the slump in commodities indicate something's awry with the global economy?

by , 29 September 2014

Commodities have taken a tanking over the last couple of months.

Gold, oil and platinum are just some of the commodities falling in price.

So is a fall in commodity prices just bad news for companies concerned with natural resources? Or could it indicate problems with the global economy?

Let's take a closer look…

The effect of a strong dollar on commodities

The dollar has been gaining ground as traders speculate on interest rates rising in the world’s largest economy.

Traders have returned to the dollar in their droves, ditching raw materials as a store of value, Rachel Gearhart in Investment U explains.

The result? Global commodities are languishing at a five-year low.

So what does this major dip in commodity prices mean? Is it a cause for concern about the global economy?

Have a look at the chart below…

Chart of commodities' slump

The above chart shows the Bloomberg Commodity Index, the price of Brent crude oil and the price of iron ore.

The Bloomberg Commodity Index, which consists of 22 raw materials, is down 5.6% this year. Brent Crude is down 12%, at a two-year low. And iron ore is at a five-year low.

Is this tumble in prices a cause for panic about the recovery of the global economy?

Sean Brodrick, a commodities expert, doesn’t think so. He says that the drop in prices is a “concern for the larger economy”.

But he says that grain harvests are soaring across the world and oil supply is high. It is high supply that is weighing on the price. Not a lack of demand.

As long as the demand for commodities continues, lower prices shouldn’t influence the global economy.

So there you have it, why the slump in commodities doesn’t indicate something’s awry with the global economy.

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Could the slump in commodities indicate something's awry with the global economy?
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