Major cause behind global commodity price hikes
All through CY11 and particularly in CY12 so far, the commodity prices have remained aggressively volatile and generally on the higher side. Primary commodities have been on this jittery road, climbing up most of the time and rebounding after short dip spans. Conventionally, the demand-supply factor would be the first reason that would come to the mind during times of high uncertainty; inelastic demand and tight supply of these commodities is a very valid cause behind the route taken by the commodity prices. There is no denying that the trade barriers, supply shocks, geopolitical and weather related changes dictate the prices in the commodity market, and the numerous world examples are there to bear testament. But something extra should explain the continuously rising demand in Asia when the individual economies have varying dynamics, or how major commodities are moving together. The long held and proven claim of demand and supply playing the prime role loses its shine to some extent when the virtual markets are taken into account. Besides physical markets, existence of financial investors has resulted in an increased integration between the commodity and the financial markets all around the world. Today, price discovery of crude oil, gold, or even agricultural commodities is not entirely based on what happens in the oil producing, gold producing economy or rice exporting country respectively, but on a larger and more intertwined derivatives market, which has grown tremendously in many developed and developing economies. Also, the fundamentals of the commodity markets and equity markets differ not only globally but also regionally. But it is seen that they also move in tandem. This is because of the speculation, sentiments and anticipations of millions of those involved in the financial markets. Such responses are usually on a generalised basis and have deeper impact on the commodity prices. The disadvantage lies in the price discovery, which becomes spurious and far away from the actual supply and demand.