Global Liquidity Boom Good for Commodities


The latest global liquidity boom that began in December was a turning point for global markets and commodities. The announcement of the European Central Bank’s Long-Term Refinancing Operation (LTRO) has given investors the clarity they coveted regarding the eurozone, and around the world central bankers have shifted from tightening measures to policies geared toward growth.


By Frank Holmes


THE US FEDERAL Reserve recently confirmed that it will keep interest rates at “exceptionally low levels” through 2014, a move that many suggest points to another round of quantitative easing (QE3). The actions taken by the European Central Bank and the Fed to fight deflationary pressures mean negative real interest rates will be around for a while. Developed countries aren’t the only ones adopting


‘easy money’ policies. Emerging markets such as China, Russia, Brazil, Turkey and Indonesia have implemented monetary policies designed to inject liquidity into the system and stimulate economic growth. For China, this is a dramatic policy shift from the past two years and signals the Chinese government is no longer worried about its economy overheating and is looking to promote growth. In total, 77 countries were instituting stimulative measures by early February. One of the main weapons central bankers have


employed is increasing money supply, which has created a ton of liquidity in the global system. Global money supply grew 9.5% in January 2012, down from the second half of last year but still growing at a substantial rate. China experienced a record increase in money supply during December and is now pegged at more than 6 trillion yuan, rates comparable to the height of the financial crisis in early 2009. Several risks remain but these measures are


already having a positive effect on economic activity. The JP Morgan Global Manufacturing Purchasing Managers’ Index crossed above the three-month moving average at the end of December. Going back to the inception of the index in 1998, there have been 20 occurrences when the one-month number crosses above the three-month. When this happens, it has signaled higher prices for many commodities, especially oil, copper and basic materials. UBS is forecasting global industrial production


(IP) growth of 2.25% year-over-year in 2012. While this is a slower rate than recent years, the fact that


it is positive should be a driver for base metals because they are positively correlated with global IP growth. Since 2003, base metals prices have moved in tandem with global IP growth 87% of the time. Copper and other commodities have already


begun to show the effects of this shift toward easing monetary policy. Silver has jumped over 20% while platinum, gold, and copper have all seen double-


Figure 1: Record Increase in China’s M-2 Money Supply 3-month change in absolute level, billion Yuan


1000 2000 3000 4000 5000 6000


0 1996 1998 Source: Weldon Financial


digit gains. Natural gas, which was the worst performer in 2010 and 2011, continues to lag the group as the effects of new shale technologies are digested.


Copper and other commodities have


already begun to show the effects of this shift toward easing monetary policy


The Year of Two Halves Two words can describe commodities’ weak


performance in 2011: uncertainty and volatility. The threat of a fallout from the sovereign debt


crisis in the eurozone, a double-dip recession in the US and an overheating Chinese economy kept investors guessing which direction the market was headed. Every time it seemed like the fog was lifting,


March 2012 9 2000 2002 2004 2006 2008 2010


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