Is the commodity recession here? Recent Evidence By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

July 27, 2015 | Posted by bobbysrinivasan << back to blog

The recent galloping drop in the global commodity prices is a telling sign what is in the offing for the global financial markets. Let us look at some of the important commodity prices in the recent days.

Crude Oil: Only a couple of years ago the Brent crude touched a high of 147 dollars a barrel. Oil analysts were predicting that 200 dollars a barrel will become a reality sooner than later. Yesterday Brent crude touched around $ 50 a barrel and there is not telling as to where it is heading. Saudi Arabia, the swing producer (it used to cut production whenever the prices fell to push the price back up. They could afford it, because they had $ 800 billion reserves) announced that they will continue to pump even if oil hit $ 20 a barrel. The US Shale oil is adding nearly 10 million barrels a day to the global supply. Thanks to the nuclear deal Iran is ready to pump 400 to 600 thousand barrels a day. Should we then be ready for a $ 20 a barrel? Oil consuming countries will save a horrendous amount of money due to this price drop. As far as India is concerned we can expect a large number of the Indian expatriates in the Middle East and Nigeria to return home due to oil price induced recession.

Gold: Having seen a high price of $1911 dollars an ounce only a few years ago, the price of gold today is $1110 an ounce, a drop near $800 an ounce or a 40% price decline. This is clearly a leading indicator of what could happen to other metal prices. Indians have in their private possession approximately 20,000 tonnes of gold. The price drop is a huge hit on individual’s net worth. A $1000 an ounce is a real possibility especially if Janet Yellen of the US fed decides to push up the discount rate. This could encourage many countries who have stock piled gold as part of their national reserve to sell them at a deep discount, which could trigger a bigger drop in global prices.

Silver: Not to be left behind, the price of silver has taken a big drop in the last couple of years. Only a few years ago an ounce of silver was trading around $44 an ounce. Yesterday it was trading at $14.50 an ounce, a drop of $30 an ounce or a near 70% drop in price. Indians worship silver and this steep drop in prices make this metal literally worthless. The price of silver is highly correlated to gold price and so one could expect the silver price to move towards a $10 an ounce, a price that prevailed two decades ago.

Iron Ore: The price of iron ore has taken a real beating. From the near about $ 200 a tonne, it is currently trading around $20 a tonne. Would you believe this?

Copper: The price of copper is a leading indicator of the global economic recovery. Every time an economy recovered from a recession the price of copper moved up first. In the last four years the price of copper has already dropped by more than 50%. Further decline looks a certainty.

Dr. Raghuram Rajan our RBI Governor recently warned up about a possible global deflation similar to the one we had in 2008 after the sub-prime crisis. Clearly the drop in commodity prices supports his observation.

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