COMMODITIES/CHINA

Will China’s hike in interest rates hurt commodity prices? In my opinion: maybe. In itself, the 0.27% increase engineered by the People’s Bank of China will not be sufficient to markedly slow down the country’s economy and thus will not have a meaningful impact on global commodity demand. Why? Because I don’t believe that China has an inflation problem and thus don’t see the central bank’s action as the beginning of a long series of rate adjustments. Even so, Beijing’s action may nonetheless affect investor sentiment on raw materials, and in turn cause some speculative commodity positions to be unwound. If that happened, we could still see a spring correction in commodity-related stocks.

COMMODITY STOCKS

Until recently, a meaningful correction in raw material prices was built into commodity stock valuations. For example, many analysts used $480 or $500 as the gold price assumption for this year. Now that’s changing: a number of brokerage firms have increased their base price for gold to $650 and even $700. The same is true of copper, which has advanced at an even more rapid pace. What that means is that revised price targets heralded by the brokerage industry for some commodity stocks may have become overly optimistic. A notable exception is the energy sector. For oil, most sector analysts still use price assumptions of $58-62 for this year and $50/$55 for 2007; for natural gas, they use prices of around $6.25 and $8.00 respectively. These assumptions may well turn out to be too conservative.

WORLD ECONOMY

For the first time in 37 years, all of the world economy is experiencing positive grow growth. Moreover, the average growth rate is a respectable 4.4%. In the context of the major economies, too, things look good. During the past decade and a half, either the US, Europe or Japan were in recession. We now are as close to what we’ll ever be to global coordinated growth. That is excellent news for those betting on continued strong commodity demand.


Peter Cavelti’s background as a financial analyst and author spans 35 years and four continents. His grasp of global issues is extraordinary and his comments and books have been published internationally. He was president of Canada’s Guardian Trust and subsequently owned his own firm, which managed some of the best-performing natural resource mutual funds. Peter firmly believes that only an integrated understanding of geopolitical, demographic and economic events can lead to successful investing, and that is what his web service Perspectives is about. If you feel keeping on top of relevant global events takes too much time, Perspectives is for you. Whether it’s investment advice or political analysis, Peter offers his insights in concise and easy-to-read form. Best of all, Perspectives is free. Visit www.cavelti.com and sign up today!