January 2009 Market Update - Commodities

It will come of little surprise to readers to hear that commodity prices have retreated markedly since their peaks in the summer of 2008. Anyone driving a car will know one of the major components has fallen significantly. However, this trend is not expected to continue, as commodities too were somewhat driven by the liquidity issue, except they experienced a positive impact before the negative one came in. Up until very recently we held significant levels of cash within the Marlborough Commodity Fund which many clients hold. However, during late November and through December we started to re-invest in the commodities markets as our indicators suggested the market had gone from a bubble to being oversold.

It is highly likely that the US dollar will continue to weaken against most major currencies (we don’t include the pound in that category) after its strong run following the bailout of US financial institutions. It is very difficult for a country to continually print money and expect its currency to remain strong against those issued by economies who aren’t doing the same. If this is the case then commodity prices are likely to rise as producer countries expect more money for their product. Given that commodities are priced in dollars, the only way for this to happen if the dollar is depreciating is for the underlying commodity prices to rise.