Growth in emerging markets and unpredictable world events have conspired to push up commodity prices over the last year, sparking inflationary fears that have fed the market for precious metals.
Commodity prices increased 2.7 percent from a year ago, according to March’s Consumer Price Index (CPI), though the change was a more modest 1.2 percent when excluding the volatile food and energy sectors. The energy index of the CPI was the primary contributor to the all-items index, while food indexes also rose sharply.
Crude oil reached its recent peak on April 7, when it finished trading at $110.30 a barrel. That’s a 40.1 percent increase from its recent low of $65.96 a barrel at the close of trading on May 24 of last year.
Thus far, oil prices have reverted to their pre-crisis levels, according to Richard Carson, professor of economics at the University of California at San Diego.
“But a lot of people who study energy prices are of the view that given world demand and production, we are going to find a new higher level than we were experiencing pre-financial crisis, and that that’s going to continue, he said.
There was some hope during the financial crisis that oil producers would add capacity to keep prices low in the ensuing recovery, but that doesn’t appear to have happened, Carson said.
James Hamilton, professor of economics at the University of California at San Diego, said oil prices aren’t likely to fall much in the coming months.
“I don’t see a quick resolution to [the war in Libya], and another [factor] has been strong demand for oil from countries like China, and I don’t see much reason for that to change either,” he said. “Prices might have gotten a little bit ahead of what was warranted, and maybe some of that will be reversed a little. But we’re facing challenges that won’t go away in the next few months.”
Meanwhile, the food index of the CPI increased 2.9 percent during the 12-month period ending in March. The price of soft white winter wheat reached its peak of $8.73 per 60-pound bushel on February 11, and ended trading on April 13 at $7.87. Its high was up 49 percent from a recent low of $4.45 a bushel on June 8. Hard red winter wheat prices spiked at $9.18 a bushel on February 9, a 57 percent increase from its low of $3.88 at the close of trading on June 9 and 10.
Increasing demand from developing nations has inflated prices in the grain commodity markets. Particularly, China is consuming more wheat as it grows wealthier.
The Japanese tsunami has also damaged global agricultural production.
Most importantly, though, Carson said food prices are closely tied to oil prices, due to the fuel-intensive nature of farming.
“In a sense, energy prices are raising fuel prices,” he said.
Coffee prices, which tend to rise or fall based on weather patterns, reached their recent high of $3.20 per pound on March 9. Its recent low was just less than a year earlier, on April 19 of 2010, when it closed trading 41 percent lower, at $1.88.
But the weather shocks that affect the price of coffee mean that changes shouldn’t last longer than a year.
Increases in food and energy prices have sparked inflationary concerns, even as economists say core inflation, which stood at just 1.1 percent over a year ago as of the end of February, makes those concerns moot. Investors have poured money into gold and silver as a guard against the perceived threat.
The price of gold has run up 28 percent in just over a year, from a recent low of $1,062.85 per ounce at the close of trading on February 2 last year to a high of $1,474.93 on April 8.
Silver had its recent low last February 10, when it closed trading at $15.20 per ounce. Its value jumped 62 percent between then and April 8.
Where oil was driven by political events, and food by crop conditions, Alan Gin, professor of economics at the University of San Diego, said precious metals has been driven almost entirely by speculation.
“There is an element that has apocalyptic thoughts,” he said. “Those types want to go into gold.”
Lynn Reaser, chief economist of the Fermanian Business and Economic Institute at Point Loma Nazarene University, said it looks like there’s a price bubble in the precious metal markets. Tightening from central banks would threaten those markets, she said, making it an unattractive investment at this point in the cycle.