If It’s Underground, Maybe Its Price Is, Too

IN waves of intense selling, an array of commodities extracted from beneath the earth’s surface — from gold and silver tooil, aluminum and copper — has fallen sharply in price this month.

Each commodity is unique, of course, with its own problems and personality. Gold retains an almost theological status among some of its adherents, who say it’s the one true store of value — yet gold’s price swings have been stunning. Oil has plenty of swagger, and its fluctuations have brought economies to their knees and countries into conflict. Copper is quietly useful and is said to convey so much information about global trends that it is called Dr. Copper — the commodity with a Ph.D. in economics.

Yet despite many idiosyncrasies, commodities have been moving largely in the same direction. With some exceptions and interruptions — notably, during the financial crisis — all of these finite resources rose in value for a decade or so. And at least for the moment, that overriding trend appears to have been broken.

What is striking is that a broad market consensus has rapidly emerged: that the immediate prospects for many high-flying commodities have grown appreciably bleaker.

“I see further declines ahead for most commodities,” saysJulian Jessop,chief global economist and head of commodities research for Capital Economics in London.

In reports this month, a host of investment banks and brokerage firms have said that a range of commodities is caught in a downdraft. Edward L. Morse, global head of commodities research at Citigroup in New York, said he “expects 2013 to be the year in which the death bells ring for the commodity supercycle.” This, he wrote, should be the first year “in over a decade in which, broadly, commodity prices end the year lower than when the year started.”

Already this year, many commodities have built up deficits. Gold is down 16.3 percent, while silver, its less glamorous sidekick, has fallen 23.1 percent. Copper has lost 13.3 percent, and oil, 4.3 percent. The S.& P.GSCI index, which tracks a basket of commodities futures contracts, is down 7.5 percent.

If commodities don’t recover together by year-end, it would be a significant reversal. From 2000 through March, gold prices rose 13.8 percent, annualized, compared with 10.9 percent for copper, 10.6 percent for oil and 9.6 percent for the S.& P. GSCI, according to Bloomberg. That’s a reason Mr. Morse and some other analysts have called the long climb a supercycle.

David S. Jacks, an economics professor at Simon Fraser University in British Columbiawho has analyzedmore than 160 years of prices for 30 commodities, subscribes to this view. He says he has found a modest, 2 percent annualized price increase since 1950, adjusted for inflation. But he discerns supercycles within this trend. After roughly 15 years of generally upward movement, he believes that we have entered a phase of declining prices.

Like Mr. Morse and Mr. Jessop, he says that after the Asian currency crisis of the late 1990s, the explosive growth of resource-hungry emerging economies like China’s helped set off a multiyear commodities price boom. And he says today’s apparent slowdown in China, and signs of weakness in the global economy, have contributed to the current decline.

Mr. Jacks has found tight correlations among nearly all “hard” commodities — “those that are extracted from the ground, rather than grown on it.” Part of this may be because of the “financialization” of commodities — their inclusion in indexes andexchange-traded fundsthat let traders place bets by pressing a button. Agricultural commodities like wheat that are included in broad indexes like the GSCI have come to share in these price movements, he says.

Because so many commodities are finite, Mr. Jacks says, population pressures and industrial growth have given prices a modest upward long-term trend that should eventually dominate again.

MR. JESSOP agrees with some but by no means all of this. While he expects gold to recover as an alternative to currencies like the dollar, he says commodities over all are likely to decline for a while.

Low interest rates and the liquidity uncorked by the Federal Reserve and other central banks helped account for commodities’ climb in recent years, he says, but asset classes like stocks now benefit more from that easy money. He says shocks from the euro zone and China are more likely to hurt commodities than equities, especially in the United States. That’s because stocks “represent a claim on the cash flow of corporations for years to come,” he says, “and those long-term flows aren’t as economically sensitive as commodities are.”

But he does not recognize the existence of commodities supercycles.

“It’s been more like a roller coaster, with booms and busts and prices moving up and down,” he says. All else equal, he says, when prices rise, demand tends to decline and supply to increase — leading to a glut. “I’m not sure that I see any cycles beyond that.”

Jeremy Grantham, founder of the Boston asset management firm GMO, sees the commodities price decline as a short-term investing opportunity for individuals and for his own family foundation, which has made major donations to organizations focused on the environment, includingInsideClimate News, the nonprofit that recentlywon a Pulitzer Prize.

Mr. Grantham says he is making long-term buys of “good farmland and forestry and, secondly, in good stuff in the ground like oil, copper, potash and phosphate.” He quickly adds, “Skip coal and tar sands because they will be priced out of business.” Natural gas, which has been plentiful and cheap in the United States, is likely to be in high demand and climb in price, he said.

Seeing the planet as endangered by climate change, he says human ingenuity must respond fast enough to stave off disaster. In the meantime, he says, crucial commodities are likely to be in scarce supply — and he expects them to rise in value over the next decade.

“There just isn’t enough of these things,” Mr. Grantham said. “Of that I’m confident.”