In a global economy still inching its way out of a recession, Greece’s recent debt crisis has imbued trade floors with a fresh wave of uncertainty. Even with a $1 trillion rescue package from the IMF and EU making its way down the pipeline, fears of contagion are still very much alive. As the European Monetary Union (EMU) shows the first real signs of frailty since the establishment of the Euro, within the bat of an eyelash the future of the euro currency could suddenly be in jeopardy.
On 14 May, the currency sank to a 14-month low against the dollar, falling by nearly 7 percent over the course of the last month. On the 17, it momentarily sank to a new four-year low, before eventually rebounding. But according to some, the worst may still be yet to come.
Barron’s speculates that the euro could drop even further—perhaps reaching parity with the dollar by the year’s end, while Paul Krugman and several others have begun openly questioning the future of a European common currency. Even German Chancellor Angela Merkel, while denouncing investor speculation against the euro, has admitted that the bailout package will likely do nothing more than “buy time” for the EU to address the more systemic fiscal inequalities that led to today’s crisis.
Europe’s economic bigwigs will certainly have plenty of questions to answer in the weeks and months to come. Perhaps even more uncertain than Europe’s economic future, though, is the ripple effects that the debt crisis could release upon other markets. With the euro fading and the dollar surging, we could soon see a shift away from the tumultuous seas of currency markets and toward the traditionally more placid harbors of commodities.
Unlike currencies or more protean financial instruments, commodities can usually rely on steady demand from global industries to keep prices comparatively stable. In theory, the economic rationale sounds logical. But, as is often the case, economic theory isn’t always consistent with reality.
True to form, investors have already begun flocking to gold, which has enjoyed a sustained surge in prices as European contagion fears have snowballed. On 12 May, spot prices for gold hit a record high of $1,243.10 per ounce, before dipping slightly to $1,230.10 the next day. Over the past three years, in fact, the commodity’s price has risen by a staggering 84 percent.
Yet in a recent article titled, “The Gold Frenzy: Why Investors Should Resist,” Bloomberg Businessweek’s Ben Stevenson cautions against this modern day gold rush, citing the concerns of several financial experts who warn that the precious metal may have already hit its price ceiling.
As Stevenson points out, gold isn’t even as steadfast as some believe it to be; the metal’s market value may have risen astronomically over three years, but the ascension hasn’t been without its fair share of volatility. Between 2 December and the first week of February, for example, the commodity fell 12.6 percent, before rising a full 16 percent in the subsequent three months.
Nevertheless, many remain convinced that Europe’s currency crisis, coupled with latent concerns over the US account imbalances, can only help to push capital toward the real or perceived “safe haven” of commodities.
"All we can do is put our money into real assets, because paper money everywhere is being debased," Rogers Holdings chairman Jim Rogers recently told Bloomberg Television.
The notoriously bullish Rogers also told Reuters he doesn’t expect the redirection of capital to be geared exclusively toward gold either. “Oil supply is going down faster than demand,” he explains. “Known reserves are in decline and while that continues to happen oil prices are going to go much, much higher."
It’s important to keep in mind, however, that neither oil nor gold are typical commodities. The former has always suffered from considerable market volatility, in part because of the unique geopolitical factors that govern its pricing mechanisms. The latter, meanwhile, has virtually no industrial value, unlike other metals, ores or alternative energy sources.
While these two markets remain at the forefront of current investor speculation, a truly circumspect analysis of commodity markets should acknowledge that demand for most commodities will be intrinsically linked to prospective industrial growth. Fears of a stagnant European economy may lead to short-term fluctuations in futures trading, as we’ve already seen with crude oil. But on a larger scale, the Greek tragedy playing out before us may be a harbinger of an industrial paradigm shift that’s been approaching for years.
Most commodity-rich exporters, like the Saudi Arabian oil industry, have long since turned a growing amount of their attention eastward, where Chinese demand for energy continues to grow without showing significant signs of abatement. Giving Asia’s relatively limited exposure to European banks, it’s entirely conceivable that Eastern demand for industrial resources could remain steady—or even increase—in the face of Europe’s newfound fiscal austerity.
All possible scenarios, of course, remain dependent upon the condition that Greece’s debt woes don’t send the world into a double-dip recession. Assuming that the international aftershocks of the crisis are indeed muted, though, and that Asian demand continues to fuel industrial growth, commodity markets, while not a paragon of stability, may prove to be the safest investment choice in a largely unsafe climate.
Amar Toor - a P aris-based freelance writer and consultant at the OECD. The views expressed in this article are those of the author, and do not reflect the policy or views of the OECD.
