Even though many people have been talking about the losses on the Greek and Chinese stock markets, the real losses have been coming from somewhere else. The commodities market has suffered the most over the last year or so. Oil prices have dropped by 10 percent while coffee prices have also dropped by a staggering 30 percent. Even though the Greek market has only dropped 5 percent up until now, they still seem to be getting more attention than the commodities complex.
But why have commodities fallen to their lowest trading value in 13 years? Here are some of the reasons why shares in commodities are being sold so cheaply.
Global Growth Slowing Down
When the economic activity of a country – or indeed the world – starts to deteriorate, commodities are one of the notable industries that tend to follow suit. Commodities such as energy and metals used in industrial work tend to take the biggest hits. This is because when there is limited growth, the demand for these particular products goes down.
Fed Hike Expected Imminently
With fall fast approaching, many people are expecting the Federal Reserve to announce a hike. While growth has been below expectations, the drop has not been sharp enough to stop this from happening. When the expected hike does take place, it will raise the dollar up even higher that its current 8 percent rise this year. This will happen because other central banks are easing rather than hiking. When this happens, real estate also rises. This will have a direct impact on commodities, especially on things like precious metals.
This has been one of the biggest factors that have been affecting areas like energy prices. More specifically, crude oil has been taking the biggest hit due to excess supply. The supply of crude oil from the Middle East has been increasing, to such an extent that the US alone saw an increase of 500k barrels of crude oil since the start of 2015. This problem does not look like it will slow down anytime soon either. A deal with Iran is in the works and countries like Saudi Arabia and Iraq are increasing their supplies as well.
Adding It All Up
When you put all of these factors together, it becomes clear that commodities are going to be under some pressure for the foreseeable future. For that reason, investors are not investing in specific commodities. Instead, they are focusing on the companies that produce said commodities. And if you’re looking for cheaper stocks, then now could be the best time to be buying. The US energy industry is currently selling stocks at a 40 percent discount. Stocks in the metal industry are said to be even lower than that. On the commodities market at least, there are plenty of bargains to choose from.
Should Investors Be Buying Commodities?
For now, it’s best to wait. Because the prices of commodities are falling and the economy is slowing down, it’s best to wait and see how things pan out over the coming months.