Panning Market Volatility

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Despite conventional wisdom, commodity and metal prices are not about to go into carnage mode.

Despite conventional wisdom, commodity and metal prices are not about to go into carnage mode. The suggestion has been on the lips of many investors since global equity markets peaked in mid-July.

The peak was marked by the bloodletting that followed, on the back of a perceived crisis in US credit markets. There was no question, however, that fears generated by foreclosures in the US subprime mortgage market reduced the availability of corporate credit. As a further matter of fact, Chrysler Group and Alliance Boots in late July were forced to withdraw more than $22bn in loan sales from credit markets.

Investors suddenly remembered how commodity and metal prices were beaten half to a pulp during 2006, as any charts of copper prices and crude oil prices will show. During the past month, resources stocks have been sold down, sometimes by truly impressive amounts...

The bottom line, so to speak, is that the ongoing boom in global capital spending and income gains in developing and emerging economies are neutralising the fallout from the US housing market. Global inflation, moreover, is low, and chances of a recession are remote. BCA Research finds that while volatility in commodity prices will rise, the uptrend in long-dated commodity futures looks sustainable.

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