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April 23, 2008

What's driving commodity prices?

Many economists have been surprised by the big runups in commodity prices, such as oil, metals and even gold. Typically during an economic slowdown, prices of these items retreat. What's different about today's commodity market? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"What's different is that many analysts think that it's being driven by investors, some would say speculators, people who have been cleaned and taken their money out of the stock market and the bond markets because they've been fearful of losses there. They've tried to think of where can they put that money and be relatively assured that it's going to earn a good rate of return. And they've looked around and said, 'commodities.' Agricultural commodities are going up in price. Of course, oil's going up in price. Metals like gold are going up in price. So there's been a big influx of investable funds into commodities, and whenever you have that, that's going to push up the price even further. So it is contrary to what we might expect during a typical slowdown, when a slower economy tends to push those commodity prices down. Now, recently we've seen some shift. We've had a little bit of strengthening, for example, in the stock market, and we've seen some movement of money out of the commodities, and we've seen downward price pressure on those commodities. So my expectation is that as we see the economy actually improving in the future, which we hope it does, and the stock market, for example, doing better, that's going to move those investable funds out of commodities, and we may actually see a softening of prices in areas like oil and gold and agricultural commodities. This probably won't happen until late summer or early fall."

Posted by Dave at April 23, 2008 08:00 AM