Long-term trends in the Real real prices of primary commodities: Inflation bias and the Prebisch-Singer hypothesis

Following the Boskin et al., (1996) report, it became widely recognized that price indexes in the U.S. and elsewhere overstate inflation. Svedberg and Tilton (2006) highlighted that this inflation bias may have important implications for estimated long-term trends in nonrenewable resource prices. ST construct an inflation-bias corrected CPI (and PPI) for the U.S. and use their corrected deflator(s) to define a so-called ‘real real’ price of copper. Their ‘real real’ price of copper is then used to re-estimate long-term trends in real copper prices. This paper proposes a quick method for obtaining inflation-bias-corrected estimates of long-run trends in real primary commodity prices directly from estimates in the published literature. Our approach obviates the need re-do existing empirical studies using a corrected or ‘real real’ price of nonrenewable resources. The two approaches are mathematically equivalent.     

An overview of global gold market and gold price forecasting

The global gold market has recently attracted a lot of attention and the price of gold is relatively higher than its historical trend. For mining companies to mitigate risk and uncertainty in gold price fluctuations, make hedging, future investment and evaluation decisions, depend on forecasting future price trends. The first section of this paper reviews the world gold market and the historical trend of gold prices from January 1968 to December 2008. This is followed by an investigation into the relationship between gold price and other key influencing variables, such as oil price and global inflation over the last 40 years. The second section applies a modified econometric version of the long-term trend reverting jump and dip diffusion model for forecasting natural-resource commodity prices. This method addresses the deficiencies of previous models, such as jumps and dips as parameters and unit root test for long-term trends. The model proposes that historical data of mineral commodities have three terms to demonstrate fluctuation of prices: a long-term trend reversion component, a diffusion component and a jump or dip component. The model calculates each term individually to estimate future prices of mineral commodities. The study validates the model and estimates the gold price for the next 10 years, based on monthly historical data of nominal gold price.     

Oil spills on other commodities

This paper examines the effect of crude oil prices on the prices of 35 internationally traded primary commodities for the 1960–2005 period. It finds that the pass-through of crude oil price changes to the overall non-energy commodity index is 0.16. At a more disaggregated level, the fertilizer index had the highest pass-through (0.33), followed by agriculture (0.17), and metals (0.11). The prices of precious metals also exhibited a strong response to crude oil price. In terms of individual commodities, the estimates of the food group exhibited remarkable similarity while those of raw materials and metals gave a mixed picture. The implication is that if crude oil prices remain high for some time, as most analysts expect, then the recent commodity price boom is likely to last much longer than earlier booms, at least for food commodities. The other commodities, however, are likely to follow diverging paths. On the methodological side, the results show that price indices, while providing useful summary statistics, they need to be supplemented by individual commodity analysis.     

Estimating the volatility of mining projects considering price and operating cost uncertainties

In the real option pricing model of valuation and decision making, the estimation of future volatility is a key input parameter. For traded commodities or financial assets, past volatility is used as a proxy for predictions. But, for projects, this approach is not feasible because, in most cases, historical data of traded projects are not available. As an alternate solution, it is usually assumed that project volatility is equal to that of commodity price. In order to investigate this assumption, we estimate the project volatility considering that both commodity price and operating cost evolve as a geometric Brownian motion (GBM). Results of a hypothetical gold mining project indicate that project volatility is higher than that of commodity price and it only drops to price volatility under very unrealistic industry conditions, such as very high prices or very low production costs. In addition, we find that project volatility is independent of production capacity and taxation, but depends on increments in price and cost, as well as strongly on their degree of correlation.     

Theory of storage,inventory and volatility in the LME base metals

The theory of storage, as related to commodities, makes two predictions involving the quantity of the commodity held in inventory. When inventory is low (i.e. a situation of scarcity), spot prices will exceed futures prices, and spot price volatility will exceed futures price volatility. Conversely, during periods of no scarcity, both spot prices and spot price volatility will remain relatively subdued. We test these predictions for the six base metals traded on the London Metal Exchange (aluminium, copper, lead, nickel, tin and zinc), and find strong validation for the theory. Including Chinese inventories reported by the Shanghai Futures Exchange strengthens the relationship further. We also introduce the concepts of excess volatility, inventory-implied spot price and inventory-implied spot volatility and illustrate some applications.     

The interest of OECD countries in ICAs and the Common Fund

This article explains that the nature of commodity price determination and the characteristics of the link between commodity prices and prices of manufactured goods are such that they have an inflationary and recessionary impact on the world economy. Subsequently, it argues that International Commodity Price Agreements (ICAs) and the Common Fund are not only in the interest of developing countries but are also in the vital interest of developed countries. They assist in stabilizing economic activities and sustaining recovery at a higher rate of growth of output and employment in these countries. Nevertheless, to be effective for these purposes, ICAs should cover a wide range of commodities and adequate financial resources should be available to the First Account of the Common Fund.     

Trends in real commodity prices: How real is real?

Testing for the existence of downward trends in real commodity prices has been the focus of several studies since the Prebisch–Singer hypothesis was formulated back in 1950. In this article, we focus on annual and monthly series of various commodity categories and consider alternative price deflators. Based on the methodology of Harvey et al. (2010), which is robust to the order of integration of the time series, we conclude that the time frequency and the price deflators play a key role when testing for the Prebisch–Singer hypothesis. For instance, at an annual frequency (1900–2003, 1900–2008), it becomes considerably more likely to support it when deflating by the unadjusted US CPI-all items than when deflating by the Manufactures Unit Value (MUV) Index or the Historical Price Index of Manufactures (HPIM). This finding is in agreement with the Svedberg and Tilton (2006) discussion on the CPI's overestimation of inflation and the measurement of the real price of copper. When dealing with monthly data (January 1957–December 2010), our results show that real prices tend not to reject the null hypothesis of a trendless series, except when deflating by the PPI-Crude Materials and, to a lesser extent, by the HPIM.     

The relentless progress of commodity exchanges in the establishment of primary commodity prices

A continuously expanding group of commodities are being priced on commodity exchanges. This paper explains the causes to the increasing preference of exchanges as pricing instruments. It also provides the detail of the shift in the 1970s and 1980s from producer determined prices to prices set by commodity exchanges for three major commodities—aluminum, nickel and petroleum.     

Commodity currencies and currency commodities

There is a large literature on the influence of commodity prices on the currencies of countries with a large commodity-based export sector, such as Australia, New Zealand, and Canada (“commodity currencies”). There is also the idea that because of pricing power, the value of currencies of certain commodity-producing countries affects commodity prices, such as metals, energy, and agricultural-based products (“currency commodities”). This paper merges these two strands of the literature to analyze the simultaneous workings of commodity and currency markets. We implement the approach by using the Kalman filter to estimate jointly the determinants of the prices of these currencies and commodities. Included in the specification is an allowance for spillovers between the two asset types. The methodology is able to determine the extent that currencies are indeed driven by commodities, or that commodities are driven by currencies, over the period 1975–2005.     

Feasibility,forward pricing and returns: Recent developments in the literature on futures trading

In recent years the feasibility conditions for market establishment and the information value of futures markets have been central issues in futures market research. This paper first discusses recent developments under the heading of feasibility conditions, including the obsolescence of the commodity characteristics approach and the search for a comprehensive framework. Second, futures markets collect and disseminate information, and in so doing they are centres of rational price formation, and the forms of tests that have been developed to ascertain whether they perform this function efficiently are considered. Futures markets also perform a forward pricing function: their prices may be regarded as market anticipations of subsequent cash prices. 1970s' literature has addressed this question, finding differences in performance between continuous and non-continuous inventory commodities. This paper discusses the reasons for and economic implications of these results.     

Economic rationale for Canada's future uranium policy

After the dramatic increase in prices for uranium over the 1972–1975 period, prices have declined in real terms. This article examines the future supply, demand and price trends for uranium, and predicts that a situation of excess supply will result in the 1980s, bringing a continuing decline in real prices, unless Canada and other net exporters, most importantly Australia, agree to restrict supplies in order to maintain the price of uranium at its present level in real terms. Such a policy would have substantial benefits for Canada and other net exporters of uranium.     

猪肉价格周期波动的时空差异特征及影响因素研究

我国作为猪肉生产大国、消费大国,猪肉价格波动事关普通百姓生活。利用2001—2019年猪肉价格省级面板数据,对猪肉价格长期波动的空间差异性进行了分析。结果表明:①从我国八大经济区及调入区、调出区猪肉价格区域差异测度结果来看,北部沿海区域内各省份猪肉价格差异最大,东北区域和长江中游区域差异较小;同时从猪肉价格差异贡献率来看,区域内差异贡献率更大。②从猪肉价格波动时空演进测度结果来看,地区间差异明显存在,同时各省份之间空间集聚性呈现出波动状态,表现出先减弱后增强的长期趋势。③从对猪肉价格周期性变化规律分析结果来看,价格波动存在明显的周期性,“猪瘟”、重大疫情等突发因素短期影响作用较大,而常规因素的影响才是价格波动真正推手。④在所筛选的猪肉价格常规影响因素中,育肥猪配合饲料价格、仔猪价格、地区生产总值引起猪肉价格差异的作用显著,且育肥猪配合饲料价格对猪肉价格差异影响程度最大。     

Instability in primary commodity markets

The two principal objectives of this paper are, first, to consider the behaviour of primary commodity prices on world markets. In particular, the degree of price instability in each of 19 primary commodity markets in the period 1953–1974, and the long-run behaviour of primary commodity prices relative to the price of manufactures (‘the terms of trade’) are analysed. Secondly, measures of export earnings instability are presented which determine its degree and geographical extent. The importance of world primary commodity trade both for the developed countries as major importers and exporters and for the less developed countries as large exporters is also pointed out.     

The crude oil market and the gold market: Evidence for cointegration,causality and price discovery

Given that the gold market and the crude oil market are the main representatives of the large commodity markets, it is of crucial practical significance to analyze their cointegration relationship and causality, and investigate their respective contribution, from the perspective of price discovery, to the common price trend so as to interpret the dynamics of the whole large commodity market and forecast the fluctuation of crude oil and gold prices.     

The great metals boom: A retrospective

The metals boom that ran from 2003 to 2008 represented the most powerful and sustained such boom since the Second World War. As the boom gathered momentum, the notion began to emerge that commodities were at the beginning of a multi-year ‘super cycle’ driven by demand growth in the emerging economies and, in particular, China. The persistence of the boom helped sustain this belief right up to the point when metal prices collapsed in the second half of 2008. Looking back over the period, much of what occurred can be readily explained by the unusual strength of the demand shock and the lagged response of the supplying industry, with prices receiving an additional boost from the activities of commodity investors. There is, however, some evidence to suggest that the combination of downward pressure on the costs of manufactured goods and upward pressure on the costs of mineral commodities which accompanied the boom marked a shift in the terms of trade between these two product groups. This in turn seems to have brought to an end the sustained decline in real terms metal prices that occurred in the years following the boom of the 1970s. In sum, the key structural change taking place may not have been on the demand side of the industry as the super cyclists maintained, but on the supply side.     

The boom in mineral markets: How long might it last?

The commodity price boom that emerged in 2004 has proved far more persevering than its predecessors of 1950 and 1973. Some analysts have suggested that it may represent the start of a “supercycle” caused by the voracious raw materials demand from China and other emerging economies, with prices remaining high for 20-30 years. We offer an alternative explanation. For a variety of reasons, the establishment of new capacity in minerals and energy to match the accelerated demand trends is more time consuming than commonly assumed, and may take a decade or longer. As soon as the new capacity is in place, however, the boom will be punctuated. Prices may collapse much earlier in the event of a severe recession that cuts the growth in commodity demand.     

Investor demand and spot commodity prices

The on-going debate over the influence of investor demand on spot commodity prices largely attempts to assess this influence by measuring the growth in investor demand in recent years. Given the serious data problems that plague such analyses, this article pursues another approach in the hope of providing useful insights into the impact of investor demand on spot commodity prices. It focuses on the mechanisms by which investor demand affects spot prices, and in particular on two questions. First, how does an increase in investor demand on the futures markets affect the spot market and spot price? Second, when investor demand is increasing and pushing a commodity's price up, do physical stocks of the commodity also have to be rising, as economists and others widely assume?On the first question, the article concludes that a surge in investor demand raising prices on the futures markets will have a direct and comparable effect on the spot market prices when these markets are in strong contango. However, when markets are in weak contango or backwardation, price movements in the futures markets have a much looser effect on spot prices. As a result, changes in investor demand on the futures markets may have little or no influence on spot prices in the absence of a strong contango. Instead, changes in fundamentals (that is, producer supply and consumer demand) and possibly changes in investor demand taking place directly on the spot market largely determine the spot price at such times.On the second question, the article shows that investor demand can be pushing up a commodity's price even when investor stocks are falling, despite the widespread presumption to the contrary.     

Agreement about commodity agreements?

In spite of the shifts in global economic power the scope for increased intervention in commodity markets remains restricted. We have witnessed the beginnings of some changes with the increased willingness of the richer countries to discuss the commodity issue. The interest in individual commodity agreements is likely to be extended as consumers place a higher valuation on security of supplies but commodity agreements can only secure moderate and limited objectives. They represent only one of a number of tools which are available in the attempt to secure a new world economic order and they will need to be used in conjunction with increased flows of foreign aid, trade liberalisation, and schemes of compensatory finance. The integrated approach to commodities seems fraught with difficulties as does any realistic scheme for the indexation of commodity prices.     

Evaluating a small deposit next to an economically viable gold mine in West Africa from the points of view of the mining company,the government and the local community

This paper addresses the question of evaluating how much the different stakeholders stand to gain from a mining project. By carefully analysing the breakdown of the cash-flows generated, we were able to estimate the amounts received by the local community and by the national community (outside the mining area), the taxes and royalties received by the government and the profits made by the mining company. A real options framework was used to take account of the inherent uncertainty on the commodity price and the reserves, and the operating flexibility (that is, the possibility for the company to stop mining if the commodity price drops and/or the reserves prove to be lower than that had been envisaged). A synthetic case-study of a gold mine in West Africa was used to illustrate how this procedure could be applied in practice. By using the real option framework we were able to envisage scenarios for developing an extension to a deposit as a function of future values of the commodity price. The procedure proposed should provide governments and NGOs with more objective data for making policy decisions.     

Economics and recycling

The author asserts that the cause of the current environmental and natural resource use problems is the attempt to run a technologically more sophisticated and significantly larger economy at higher average standards of living using outdated sets of implicit prices, relative to the real social value of environmental or natural resource services. Where these prices are implicitly set at zero, no policy, including a recycling policy, can be expected to succeed. Unless western society realises that these prices are significantly above zero, and are rising in some cases at an accelerating rate, much of the research reported will ultimately be of little or no value.