Commodities investors switching from food to energy, gold and silver

All commodities have been in a recovery phase since the wipe-out of the global financial crisis two years ago. But in recent weeks a notable new trend has emerged with agriculture and livestock coming under pressure, while energy and precious metals have taken off.

At the time of writing WTI crude was up almost two per cent at $106, silver was at a new post-1980 high of $36 and gold touched a fresh all-time high of $1,436.

Food price deflation

Why the rotation from the broader commodities complex into oil, gas, gold and silver? In part the answer is the revolutions in North Africa. Egypt, for example, was the world’s largest importer of wheat. The speculation is that Egypt will not now buy as much wheat as in the past. The world’s farmers have also been planting more crops after rising prices.

It is also true that higher oil prices are likely to dampen demand for food in the Third World where the percentage of income spent on food is much higher than in the developed countries who still carry on eating and just pay the higher prices.

That of course does not directly explain the rise in gold and silver prices, although inflation is also the most likely driver. Investors who fear rising inflation are looking for a safe haven to protect their savings and turn to precious metals.

Tight supply

Increased demand in a tightly supplied market immediately drives up prices, and naturally speculation is self-feeding and self-justifying as prices rise. The big question for professional precious metal investors is whether this rising tide of retail demand will be enough to offset the downward pull of falling stock markets over the next three months, if Dr Marc Faber’s prediction is correct (click here).

It is certainly going to offset some of that down pull. How much is hard to tell. But it must be a good sign for precious metals that speculators are coming out of agriculture and livestock and most likely repositioning in oil, gold and silver. This is a new rotation that will support energy and precious metal prices, and indeed appears responsible for at least some of their spectacular recent performance.

Indeed, if gold and silver can manage this sort of performance with stock markets weakening then imagine what will happen when stocks bottom out and it is the bond market that starts to come under pressure. That is the real nirvana for precious metals and we are not even close to that yet.