All that glitters isn't gold and despite the prominence given to the steady decline in the price of the precious metal to hit 5 year lows, in a year that has been unkind to most commodities, some have fared even worse than gold.
One very important factor affecting commodity prices is that most of them are priced in dollars (USD) with the result that a strong dollar makes the commodities far more expensive when purchased in the currencies of the importing countries. As the dollar strengthens, which has been the case in the recent, commodity prices are pushed down because of the inverse relationship they have with the U.S. currency.
The ICE dollar index (DXY, -0.15%), which measures the strength of the USD relative to a basket of 6 other major currencies, shows the greenback to be up by almost 8% year-on-year.
Craig Erlam, senior market analyst at Oanda, said in a note that, “the wider commodity market is seeing plenty of downward pressure on the back of an ever strengthening dollar.”
The Bloomberg commodity Index, which sources information from FactSet, reveals that coffee, which is quoted on the ICE Futures exchange in the U.S., has fallen in price by 23.5% this year to record the biggest drop in price of the major commodities. Second in the falling price rankings is cocoa with a drop of 14.7% this year.
The malady affecting commodities seems even worse according to data taken from an April report in Agrimoney, which shows that world demand for coffee is growing with an estimated production shortfall for the 2014 - 2015 season of 7.42 million bags. Demand for cocoa is expected to rise by 30% by 2020, driven largely by higher incomes and an increasing demand for chocolate in China, according to the Fairtrade Foundation.
The fundamentals of increasing demand in both cases should be accompanied by a price increase in terms of supply and demand laws, but strangely the opposite is very much the reality.
Amongst the metals in the commodity sector, high grade copper has recorded the biggest loss showing a drop of 12.3% on the Comex during the current year while gold, which is always in the news, has dropped by 7.2%, also on the Comex.
While gold might have lost a degree of its safe haven status, it still remains sought after in jewellery, particularly in the Indian market while the industrial applications are increasing. World production is set to start decreasing from next year which should herald resurgence in the price.