KATHMANDU: The prices of highly-traded commodities in any exchange platform are down — gold by 17 per cent, crude oil by 31 per cent and silver by 44 per cent! A reality check shows that the great majority of commodity prices are indeed falling since their indomitable highs of last year. Arguably, many would say that commodities are in a bearish trend or did we see it coming all along?

Given the two-way trading mechanism of the market, I cannot question whether commodity investors are suffering in profit-making endeavours or not. So what does this mean in the overall market spectrum? Does the fallout reflect a global economic slowdown that threatens to become another round of recession or the beginning of another bout of deflation? Or is the federal reserve too conservative in its policy or are the debt burdens stalling  economic growth? The answer to all these questions depends on the perspective of the concerned individual.

In hindsight, crude oil prices are up 550 per cent compared to the past decade, copper and gold prices are up 260 per cent and 500 per cent respectively in the same review period. Does the preceding sentence contradict the topic above? It certainly does. Just about any commodity you research is up way more than the rate of inflation over the past decade or so. Could commodity trends have something to do with monetary policy?

The big trends in the commodity prices coincide closely with major announcements in monetary policy. Policy has been overtly accommodative for most of Bernanke’s term as chairman, with the big exception being the late-2008 period, when the fed was slow to react to a massive increase in money demand, and thus became inadvertently tight until quantitative easing was launched.

If anything, the recent decline in commodity prices are a correction of overly strong gains — call it a bubble perhaps — that in turn were likely driven by the expectation that monetary policy was far more inflationary than it turned out to be. Speculative excess has sowed the seeds of the commodity price drop, since dramatic higher prices have encouraged a lot of new commodity production at the same time that expensive prices have curbed demand.

Rather than fret over weak commodity prices, we should be rejoicing that oil prices are well off their highs. But does that mean a lowering of the oil prices in our very own gas stations?

(The author is assistant manager at the research and development department of Mercantile Exchange Nepal. He can be contacted through r&d@mexnepal.com)