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Commodity Trends Warn of a Slow, Painful Economic Recovery

Published October 2, 2020 2:39 PM
Andrew Packer
Published October 2, 2020 2:39 PM
  • Oil prices are trending down again.
  • Copper prices have also seen some weakness.
  • Commodity trends suggest a full economic recovery is some time off.

The commodity space tends to rise during an economic expansion, and decline during contractions. That’s because, no matter how advanced or digitized the economy gets, physical goods that make innovations possible are required. So, it’s no surprise that the latest trends suggest the economy may flatline from here.

Oil, Copper Stalling After Recovery

Oil prices have struggled in recent sessions, dropping back under $40 per barrel. That’s still well above the short-lived scenario where speculators caused oil prices to go negative for the first time in history this year. But a decline is still a sign of weakness.

Worldwide energy demand is down, so oil demand is down. Some of that is from consumers now working from home instead of commuting. Some of that is reduced industrial demand. In any case, not all of that demand will return as the world economy restructures.

Oil 1 Year
Oil prices are down over 40% in the past year and have started to weaken in recent trading sessions. | Source: Yahoo Finance 

Meanwhile, copper, a metal known as “Doc” copper thanks to its correlation between price and economic growth, is also in trouble.

The nice thing about copper is that it can be used in low-tech applications like plumbing, to high-tech applications such as wire. While prices have been weak in recent sessions, the metal has surged far higher after hitting an 11-year low in March .

However, that rally has proved short-lived. Copper prices are now tanking as well after speculators made large bets the metal would head higher .

Commodity Wild Cards: The U.S. Dollar and China Demand

Where commodities go from here may, in part, depend on the fortunes of the U.S. dollar going forward. The world’s reserve currency was expected to face a long-term decline , so naturally, it’s instead surprised the market with a rally in recent weeks.

Dollar One Year
The U.S. dollar has dropped nearly 3% in the past year, but the currency has been prone to powerful counterrallies. | Source: Bloomberg 

As commodities are globally priced in dollars, changes in the greenback’s value can impact the role that commodities play. For instance, even though the dollar was weakening, it was the last major currency where gold broke to new all-time highs earlier this year.

The dollar may not always be in favor, but short of going to gold or cryptocurrency, it tends to hold some value among investors during times of uncertainty. But after the dollar’s sudden surge, it’s started to trend back down again.

Generally, traders also look to China when it comes to commodity trends. The massive nation is an importer of all commodities, and its buying activity can have a huge impact on the price  of goods such as copper and oil. The influential country has seen a drop in its import activity in 2020, although strategic buying in an area such as iron ore have managed to move prices  to multi-year highs.

Ultimately, it’s clear that commodity prices are showing what we already suspect. The economy will take time to recover. The fast gains from simply reopening have now largely played out. The long-term changes underway will also play a role.

Until commodity prices start to look more uniformly bullish, it’s best to assume economic growth will be slow and steady, not a massive roar back to pre-Covid times.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.