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Amid the staggering sell-off in commodities, there is a light at the end of the tunnel for investors – assuming we don’t see another global financial crisis.
The pullback in everything from oil and coal to copper and agriculture runs counter to strong Asian demand growth and structurally short supplies for metals, food and fuels.
So investors are left with a simple question: Will the European sovereign debt crisis and the resulting stress on the financial sector trigger a world economic recession as was experienced in 2008?
“The best way of assessing the likely future remains to track current economic momentum,” Credit Suisse said in a note to clients on Tuesday. “To that end, the first two months of panic looks to have had surprisingly little impact on the data from China and the U.S., although the Euro area has weakened noticeably.”
So while the situation in Europe deteriorated, if policy makers there do manage to shore up the financial system and the global economy stabilizes, many commodities should resume their decadelong upward trend in 2012.
Credit Suisse’s metals and mining analysts also noted that the magnitude of recent declines in areas such as industrial metals increases the probability that China will pursue aggressive restocking once current fears in the North Atlantic subside.
Commodities have remained relatively resilient since August as pricing reflected the current physical realities, but sentiment has been tested in the past two weeks as more forward-looking markets such as copper continue to make new lows for the year.
Jeffrey Currie, head of commodities research at Goldman Sachs, is sympathetic with the view that history does not repeat itself. But he warned that it will likely rhyme.
Barring a widespread financial crisis, Goldman considers the turmoil in Europe merely a headwind to global growth, which will weaken the upward move for commodities, but not reverse it.
So with the firm’s economists lowering their global GDP growth outlook for 2012 to 3.5% from 4.3%, its commodity analysts cut their 2012 Brent oil and copper price forecasts from US$130 per barrel to US$120 and from US$10,790 per metric ton to US$9,200, respectively.
For oil, they cite demand that is running well ahead of non-OPEC production growth. As for copper, Goldman believes the steep and rapid decline in prices is due to a growing short position in the market. The analysts suggest a potentially powerful upside catalyst lies ahead if Chinese policy makers shift to an easier stance or if lower prices draw Chinese buyers back into the market.
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