Oil, Gold and World Trade in the Grand Scheme
By Shelley Goldberg
Aug 22, 2011 12:00:00 PM | Last Updated
Aug 22, 2011 12:00:00 PM | Last Updated
The prices of gold and oil have exerted only minor effects on global trade flow.
Recent economic data does not bode well for commodity prices overall. Thus, we remain neutral in commodities, waiting for some semblance of confidence to be restored.
We do continue to hold specific subsector longs and shorts.
Figure 1: The EM Influence on Global Trade—Merchandise World Trade by Volume (2000=100)
Source: CPB Netherlands Bureau, RGE. (Advanced Economies: OECD minus Turkey, Czech Republic, Hungary, Poland, Mexico, Korea, Israel and Chile)
A key determinant in the prices of commodities going forward is emerging market (EM) demand.
We do continue to hold specific subsector longs and shorts.
Figure 1: The EM Influence on Global Trade—Merchandise World Trade by Volume (2000=100)
Source: CPB Netherlands Bureau, RGE. (Advanced Economies: OECD minus Turkey, Czech Republic, Hungary, Poland, Mexico, Korea, Israel and Chile)
A key determinant in the prices of commodities going forward is emerging market (EM) demand.
Global trade over recent years has been more heavily influenced by EM flow than that of the developed world (Figure 1).
Yet June trade data, as per CPB Netherlands Bureau, is a cause for concern.
June world trade fell 2.2%, close to eliminating the 2.3% (unrevised) May gain.
EM and developing country imports were down 2.5% and, overall, fell the most in Europe (-5.5%), followed by Asia (-3.6%).
On the export side, EM and developing country figures show only a minor drop, while Europe and the United States exhibited greater declines (-4.3% and -3.3%, respectively).
Total world trade volumes fell by 0.6% in Q2 after posting a gain of 2.6% in Q1, which was largely attributable to a positive carryover from 2010.
Taking into account the gradual but steady repair of the supply chain following Japan’s March 11 tsunami, Asia’s numbers are unimpressive.
EMs have been the dominating factor in trade flow over the years, yet their future is precarious due to the significant reliance of exports to developed markets, which continue to face heavy deleveraging pressures.
The drop in trade volume can be explained in part by higher prices earlier in the quarter, which dampened orders for June, subsequently resulting in a fall in June commodity prices (gold: -2%; WTI: -7%).
Crude oil demand destruction did come about in line with a decline in Libyan oil output, as we foresaw in our Crude Oil Price Scenario Analysis.
June also marks the start of a slower market for physical gold in Asia, which tends to show an upturn each September.
Adding to this causal effect is that most commodities are purchased along the forward curve, and not in the spot market—today many commodities (including gold and WTI) are in contango, meaning forward prices are at a premium to spot.
Finally, Chinese commodity demand began to weaken in Q2 and continued to fall in July. This was evidenced in commodity import data (Figure 2), suggesting a lag in Chinese stockpiling and a delay and/or halt in construction projects, most notably in high speed trains.
Figure 2: Chinese Commodity Import Growth (%)
Source: General Administration of Customs
Figure 3: Correlation Outliers—Merchandise World Trade (2000=100)
Source: Source: CPB Netherlands Bureau, Bloomberg, RGE (prices/unit values in USD)
The 2008-09 financial crisis was an outlier in terms of the high correlation between commodities, global trade levels and asset classes in general, all of which dropped (Figure 3).
Figure 2: Chinese Commodity Import Growth (%)
Source: General Administration of Customs
Figure 3: Correlation Outliers—Merchandise World Trade (2000=100)
Source: Source: CPB Netherlands Bureau, Bloomberg, RGE (prices/unit values in USD)
The 2008-09 financial crisis was an outlier in terms of the high correlation between commodities, global trade levels and asset classes in general, all of which dropped (Figure 3).
Yet overall, the correlation of the prices of both crude oil and gold to world trade are weak at best (0.24 and 0.05, respectively).
World trade has stalled since the onset of the year and is falling in line with DM growth; while global industrial production increased slightly in June, it is still down on the quarter.
July data, coupled with leading indicators such as PMIs, points to Q3 weakness.
The deterioration of confidence both in global economies and in policy makers’ response (or not), leads us to maintain our neutral stance in the commodities sector until some semblance of confidence is restored.
Confidence along with better macro data would paint a mixed picture for commodities, likely resulting in higher oil prices and lower gold prices.
