Deflation and Commodities

May 19, 2013 | by Franck Cushner, CFP®

 The commodities market reacted to the global deflationary wave that swept through international markets, with gold dropping the most in 33 years. Record trading and an unexpected slowdown in China's economic expansion sparked a market sell off, as investors were concerned about future international growth.

Gold has meandered through a range of $1900 per ounce in September 2011 to less than $300 an ounce in the late 1990s, and dropping over 9% in the month of April, making it the biggest drop for gold since March 1980.

A similar drop in silver also occurred in March, as the demand for the metal dropped to its lowest level since October 2010.

Copper, an important base metal used for infrastructure construction worldwide, fell to a 17 month low, following the release of international economic data.

As global demand for commodities fall, inflationary pressures subside and commodity prices drop. A prolonged decrease in commodity prices may be deemed as deflationary, with build-ups in inventory as materials go used.

Lower commodity costs can also boost the equity and fixed income markets because they increase consumer spending power and ease inflationary pressure.

Sources:          Bloomberg, CIA WorldFactbook

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