Commodities Dynamics Are Changing

Source:

... it is fair to assume that the price for most commodities, soft and hard, precious metals and energy included, is predominantly determined by three key factors: supply-demand, US dollar and financial investors (not necessarily in that order). This is why it is so difficult to accurately predict where prices for a certain commodity will be in a year or even six months.

Supply and demand dynamics are far from the only factor determining whether prices for oil, copper, coal, coffee and rice go up or down. Other factors can at times play at least an equally important role, such as the value of the US dollar and the impact from speculators and financial investors on a particular market.

While every market has its own characteristics, and these can change significantly at certain times and under different circumstances, therefore making any attempt to generalise incorrect by default, it is nevertheless probably a fair assumption that the price for most commodities, soft and hard, precious metals and energy included, is predominantly determined by the aforementioned three key factors: supply-demand, US dollar and financial investors (not necessarily in that order).

This immediately explains why it is so difficult to accurately predict where prices for a certain commodity will be in a year, or even in six months. Make two correct assumptions, but the third one wrong and one can possibly still end up on the losing side of the market. This also explains why securities analysts have been constantly (and still are) behind the price curve over the past years. The difficulty in accurately predicting supply and demand numbers aside, how many would have taken into account that the US dollar would weaken as much as it did against most other currencies? And how do you know how many investors will jump into the market and what their impact will be on further price developments?

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