More on the possible contribution of index fund investment to recent commodity price moves.
We and many others have been discussing whether the surge in investment fund purchases of long positions in commodity futures contracts may have been a factor contributing to the spot prices of those commodities beyond what would be warranted by considerations of physical supply and demand. John Mauldin shares an interesting graphic from Deutsche Bank researchers, showing that the prices of a number of commodities in which no futures market exists have increased even more dramatically than those traded on major exchanges.
I have long been maintaining that the broad run-up in commodity prices generally and oil prices in particular over the last five years has primarily been driven by the fundamentals of production having a hard time keeping up with surging global demand. I have nevertheless also suggested that there are additional factors contributing to the increases we’ve seen since January of this year. So I was curious to see how some of the “niche metals” featured in the graphic above been doing over the most recent months.
Rhodium and manganese, like the other commodities we’ve been following, indeed surged dramatically beginning in February:
On the other hand, while cadmium and molybdenum have had a spectacular 5-year run, they have not been doing much in 2008. Cobalt’s strong performance has also recently stalled:
All of which leaves me still believing that fundamentals are the most important part of the 5-year story, but that the falling dollar, negative real interest rates, and quite possibly fund purchases of commodity futures contracts have also made an important contribution during 2008.