This article was written by Evdokia Pitsillidou, Risk Management Associate at easyMarkets.
The price of oil, precious metals and agricultural products surged this week in what commentators are calling a commodities renaissance, even after a weekend of disruptive weather in Australia halted everything from electricity to trade and exposed insurance companies to massive losses.
Crude oil approached $53 a barrel yesterday for the first time since October in what has amounted to a 90% rally since the winter. Brent crude futures, the international benchmark, reached a high of $52.86 a barrel Thursday morning as well.
Iron ore – one of Australia’s main exports – has surged 9% since last Thursday. Wheat, another major Aussie export, is up nearly 12% since the beginning of June.
One of the most impressive rebounds has occurred in the precious metals market. Gold futures have rallied more than 4% over the past week after a dismal US nonfarm payrolls report all but guaranteed that the Federal Reserve will not raise interest rates in the coming months.
US employers added a mere 38,000 employees to payrolls in May. That was the slowest pace of hiring since September 2010.
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If there’s any commodity experiencing a renaissance, it’s silver. The grey metal spiked nearly 30% in the first four months of the year before giving up a third of those gains in May. Since the beginning of June, silver prices have rebounded 8%. As of Thursday morning, the grey metal had advanced another 19 cents or 1.1% to $17.17 a troy ounce.
Silver’s spot price was last seen trading at $17.17 a troy ounce, in line with the July futures contract.
The massive rally in commodity prices this week partially reflects renewed weakness in the US dollar, which is the base currency for energy, precious metals and agricultural goods. For this reason, the US dollar often carries an inverse relationship with these commodities. This is especially true for gold, which loses its relative investment value during periods of higher (or rising) interest rates.
The US dollar index, which tracks the relative value of the American currency against a basket of foreign rivals, has declined more than 2% since the release of the May nonfarm payrolls report on Friday, June 3.
Macro Developments Lending an Impact
These and other macroeconomic developments appear to have offset the devastating impact of volatile storms over Australia’s east coast during the weekend. As a major exporter of wheat, iron ore, oil and other primary goods, Australia is a key player in the global commodity supply chain.
The storm, which left three people dead and resulted in 280 flood rescues, resulted in hefty insurance payouts. As a result, share prices of major insurers such as Insurance Australia Group, Suncorp, QBE and Steadfast Group faced heavy losses the first day back after the weekend.
As extreme weather becomes more commonplace, commodity traders and insurers are bracing for more downside risks. Hurricanes, droughts and other weather-related events triggered by rising sea levels and warmer temperatures could cause significant supply disruptions in the global commodity chain. Droughts have ravaged the global sugarcane industry, with producers from Thailand to Brazil reporting shortages. This shortfall has pushed global sugar prices to three year highs.