The drop in commodity prices

One investment that most people could have counted on in recent years was commodities. Things like gold, silver, metals and even crops. Now it seems like all of a sudden many of those prices have reversed and are down by big amounts. Why? N.C. State University economist Mike Walden responds.

“Well, in economics everything comes down to supply and demand. Now on the demand side over the last – really — decade, decade and a half we’ve had a really big jump in the demand, the use of commodities, particularly being driven by China.

“China’s economy has expanded enormously, as most people know. Now however, China’s economy has slowed. They’re still growing, but they’re growing at much reduced rates. So, we’re not seeing the buying of commodities from China like we use to. So demand is not as robust.

“On the other hand, on the supply side, the supply of many commodities has actually jumped, metals, energy commodities, even some food commodities. So you combine these two forces, you have less robust demand for commodities. You also have more supply.

“You’re going to get lower prices, particularly when some of the price gains in the past were driven not by actual conditions but expectations that those conditions could continue. So I think one of the lessons here that we learned is it’s very risky to project the future. The future in this case, prices of commodities from past trends.”