QE3 Throws Money at Commodities, But Prices Keep Falling

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What really moves commodity prices?  That is the question being asked by investors today, who are weighing the impact of national and international supply and demand, natural disasters, and the Fed’s quantitative easing. 

And Europe’s woes further compound the issue.  Bond investors have avoided debt from risky countries like Spain, and also do not wish to park their money in the safer, low-returning German Bund, the 10-year note, which returned as low as under 1.50%.  Thus, the money is poured into more risky assets, propping up prices.

As a result, the commodities market has gotten quite a jolt.  The Dow Jones-UBS Commodity Index (NYSEMKT: DJP), which tracks a basket of 20 commodities, has risen approximately 15% since June 6, when the Fed hinted at QE3.  Since the September 13 announcement, however, the price has remained largely unchanged. 

To compare, the index jumped the same 15% when the Fed “signaled” a bout of QE in 2010, but it tacked on an additional 14% between November 10 and April 29, 2011, according to The Wall Street Journal.

Finally, international issues contribute to price changes.  China’s economy is slowing, along with its economy, which could reduce energy and agricultural demand.  Also, Europeans are cutting their costs amid hard economic times.  This means less spending on things like travel and food.

Today’s environment is confusing, to say the least.  Below is the performance of four commodities and their prices since June 6 and September 13, 2012, the times when the Fed hinted at, then announced QE3.

4 Commodity Prices

 

(October 12 prices are intraday)

<table> <tbody> <tr> <td>Commodity:</td> <td>Corn</td> </tr> <tr> <td>Tracking ETF:</td> <td><strong>Teucrium Corn <span class="ticker" data-id="224204">(NYSEMKT: <a href="http://caps.fool.com/Ticker/CORN.aspx">CORN</a>)</span></strong></td> </tr> <tr> <td>Closing Price:</td> <td> </td> </tr> <tr> <td>6-Jun</td> <td>$36.18</td> </tr> <tr> <td>13-Sep</td> <td>$49.97</td> </tr> <tr> <td>12-Oct</td> <td>$48.14</td> </tr> </tbody> </table>

Corn experienced a huge jump as droughts plagued agricultural commodities throughout the summer.  The drought caused corn prices to spike as supply dwindled.  Now, however, the harvest is looking much better, and supply looks to be coming back in line with demand, pulling prices back down from their summertime highs.

 

<table> <tbody> <tr> <td>Commodity:</td> <td>Oil</td> </tr> <tr> <td>Tracking ETF:</td> <td><strong>US Oil <span class="ticker" data-id="209447">(NYSEMKT: <a href="http://caps.fool.com/Ticker/USO.aspx">USO</a>)</span></strong></td> </tr> <tr> <td>Closing Price:</td> <td> </td> </tr> <tr> <td>6-Jun</td> <td>$32.15</td> </tr> <tr> <td>13-Sep</td> <td>$36.51</td> </tr> <tr> <td>12-Oct</td> <td>$34.01</td> </tr> </tbody> </table>

Oil prices took a hit during the summer amid excess supply and other factors.  Then, the price gunned forward amid expected demand shortages from potential storms, and perhaps even investors piling in.  Since September 13, the commodity has moved backwards, falling just under 7%.

 

<table> <tbody> <tr> <td>Commodity:</td> <td>Silver</td> </tr> <tr> <td>Tracking ETF:</td> <td><strong>iShares Silver Trust <span class="ticker" data-id="209446">(NYSEMKT: <a href="http://caps.fool.com/Ticker/SLV.aspx">SLV</a>)</span></strong></td> </tr> <tr> <td>Closing Price:</td> <td> </td> </tr> <tr> <td>6-Jun</td> <td>$28.51</td> </tr> <tr> <td>13-Sep</td> <td>$33.61</td> </tr> <tr> <td>12-Oct</td> <td>$32.47</td> </tr> </tbody> </table>

Investors appeared to be jumping back into silver, pushing prices up 17.9% from June 6 to September 13.  However, prices are hovering around the same level since that time.  Of course, this forces investors to ask: Was QE3 already fully priced into silver before it was officially announced?  It appears that way.

 

<table> <tbody> <tr> <td>Commodity:</td> <td>Gold</td> </tr> <tr> <td>Tracking ETF:</td> <td><strong>SPDR Gold Shares <span class="ticker" data-id="208812">(NYSEMKT: <a href="http://caps.fool.com/Ticker/GLD.aspx">GLD</a>)</span></strong></td> </tr> <tr> <td>Closing Price:</td> <td> </td> </tr> <tr> <td>6-Jun</td> <td>$157.21</td> </tr> <tr> <td>13-Sep</td> <td>$171.31</td> </tr> <tr> <td>12-Oct</td> <td>$169.97</td> </tr> </tbody> </table>

Like silver, gold prices have moved in a similar trajectory.  The hint at QE3 pushed up prices, which have remained stagnant ever since.  Perhaps prices will resume a run-up once the market reaps the sustained $40 billion per month, but prices could already reflect the intended consequences of the stimulus.

In all, commodity prices have followed a similar path.  They have jumped since the Fed hinted at QE3 on June 6, and then paused since the actual announcement.  Of course, I expect the markets to respond favorably to extra stimulus – but international demand could be dwindling. 

If international demand drops, investors may herd back into safer assets, like bonds and the U.S. dollar.  The result would be a market pullback, likely taking commodities with it.  This makes me wonder: Is going long commodities a nice play right now?  With decreasing international demand, and a recent price boom from QE3, I think not.

 

 


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