Unimaginable is a word, which would best describe what happened in the commodity markets

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across the world in 2008. Be it agro-commodities or metals, volatility in prices ensured that no trader or analyst would ever use words like “it cannot happen to this commodity.” Agro-commodities such as wheat and corn saw unprecedented rise in prices. As much of the corn stock was being used to make bio-fuels, prices touched an all time high. While most metals have cooled down, agro-commodities are still higher compared with their pre-global economic boom levels of 2005.

Even after the recent correction, wheat prices are up 30 per cent compared with what they were three years ago.

In metals, both ferrous and non-ferrous categories saw an unprecedented increase in prices. China was the biggest consumer. Traders at London Metal Exchange (LME) used to keep a tab on negotiations between China and metal majors such as BHP and Rio Tinto, in order to get cues for long-term future prices of various metals. It appeared that demand from China would never slow down, which made mining assets a prized commodity. But as soon as slowdown hit dragon-land, prices of metals such as copper, aluminum and steel tanked. The decline was so sharp that companies, which till early January 2008, used to talk about making multi-billion dollar acquisitions, had to be bailed out by the end of year. The number of mines that closed down within in a span of six months, were more than the number of mines, which were shut in the entire commodity slowdown period of 1995-1997.

While all this was happening, gold regained its shine after a gap of over 20 years. With the US economy in doldrums, investors clinged to gold, making it one of the best investment options during the financial tsunami.

However, during the past few weeks of recovery, gold started to lose weight again. The inverse relationship of gold and US dollar is going to continue into the foreseeable future. Any sign of recovery in the US leads to a fall in gold, while on a day when bad macro economic news hits the Wall Street, gold shines. Perhaps the best days of gold might be over but it is highly unlikely that the metal may lose the gains acquired in 2008. The reason: gold is stored, not consumed. And its cycle is very long, unlike other metals.

While the prices of steel and some non-ferrous metals have stabilised, they are not going to move up in a hurry. Demand from China, which has been the main driver for sustained rally in commodity prices, is unlikely to remain high.

It is a historical fact that any country, which hosts the Olympics, witnesses a slowdown in its GDP growth in subsequent years. So, till the time China begins to guzzle metals once again, commodities are going to remain soft.