As the world progress towards the month of August – a predominantly holiday month in the Western world I had a feeling that things would slow down in the markets. After all the traders also need a break right ? But i was wrong, my inexperience in analysing the Financial Markets was thoroughly exposed by the turmoil in the Commodities section of the market. Commodities are nice bell weather of the manufacturing sentiment of the world and in turn the larger Macroeconomic scenario.
So what exactly happened to Commodities – From Gold to Aluminium to Copper to Crude Oil , everyone had a knocking effect on their prices. The Bloomberg Commodity index fell close to 30% year on year. There were several reasons floated for the same, each metal or commodity had one or the other unique reasons. But the one most crucial reasons that affected all commodities was the slowing Chinese Economy. China had been the 900 pound gorilla that ate almost 50% of the metals and commodities produced worldwide. Naturally when the gorilla became ill its consumption pattern slowed. The rest of the world economy is not in a very robust state to make up for the demand fall in China.
The big drop in prices of the industrial metals can be more or less attributed to the above reason. In some countries there could be over production owing to rapid mining in expectation of the future demand from big Consuming countries such as China. Australia seem to be a country which falls in this category.
But the Chinese factor alone cannot explain the fall of the yellow metal.
Gold – The one among commodities which everyone relate the most in their day to day life reached its lowest level in several years.This seem musical to the ears of Indians who are one of the largest buyer of the yellow metal. Gold has always been used as a fall back option by Central Bankers in times of difficulty and is stored in Central Banks as a type of Financial Instrument. Investors worldwide know this very well and assume it to be a safe bet at all times.
So whats changing underneath that affect Gold so much. Why are investors dumping a safe bet?
Gold although a safe heaven but as such doesn´t provide good return on investment. The investors know this very well. So if they get another option which would provide a greater ROI they would not mind dumping Gold. This is exactly what has happened to Gold as investors anticipating a Fed rate hike start buying dollars. This double whammy of Chinese slow down and Fed rate hike expectation has hit the yellow metal the most in recent times.
But all is not lost for the yellow metal, the price could very increase and reach the same level if Indians start buying the gold. In India, Gold is part of the tradition and people can very well sense this opportuntiy to make a purchase. The impending festival season from September could lead to a rush in Gold buying, till then the yellow metal could be in a bearish territory. For the rest of the metals a Chinese recovery will be the panacea.