HardAssetsInvestor

Written by Amine Bouchentouf  |

January 03, 2012

The Commodity Investor: Top 5 Issues Facing Commodities In 2012

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The eurozone, emerging markets, Iran, government regulations and central banks are the players commodity investors should watch during the new year.

As we close the books for 2011 and open the first page of 2012, it’s clear that the new year is shaping up to be a pivotal one for the global economy in general, and commodities markets in particular. In this week’s column, I take a look at the top five factors that will have a big influence on commodity investing

1. European Economic Collapse

One of the biggest issues facing the global economy is the European sovereign debt situation. The eurozone took center stage in 2011 and will continue to play an important role in global economic affairs in 2012. From a macroeconomic perspective, the outcome of the European debt situation will have reverberations in many markets, commodities included.

This past year saw eurozone leadership act indecisively and struggle to solve the crushing sovereign debt problems of many of its key members. Infighting between European leaders, the International Monetary Fund and the European Central Bank eroded investor confidence in the European leadership to solve its problems. As a result, yields on sovereign bonds for Greece rose, and as did those for Spain and Italy and even France.

Because of this volatility, many commodities tied to industrial demand, such as copper, suffered steep declines. On the flip side, commodities such as gold ended the year up over 10 percent as investors sought safe haven from the euro turmoil. Europe will continue playing an important, yet somewhat asymmetric, role in determining commodity prices throughout 2012.

2. Emerging Markets Slowdown

One of the bright spots in the global economic order has been the increasing rise of emerging markets growth. Indeed, as economies in the euro region slow down, many emerging markets are growing in the mid- to-high single digits. This growth, with countries such as China growing at 9 percent and Brazil at 3.5 percent, means that emerging market economies are picking up the slack left by the mature and declining economies in Europe.

However, there is a risk that the troubles in the eurozone are so large that they may begin to affect emerging market economies, which would be a bearish note for commodities, particularly industrial commodities such as copper and steel.

3. Armed Conflict With Iran

One of the most serious threats facing the stability of the Middle East region, where over 40 percent of the world’s oil reserves are located, is a military confrontation between the United States and its regional allies and Iran.

As I’m writing this report, we’re already seeing escalating rhetoric from both sides, and the end of armed occupation/intervention in Iraq by the U.S. military has only emboldened its Persian neighbor. Already, a leading Iranian official claimed that choking off the strategic Strait of Hormuz would be “as easy as drinking a glass of water.” The United States has responded by saying such a move would be considered an act of war.

An armed conflict with Iran could force oil prices to hit $200 a barrel. In 2011, oil prices rose by 8% for the year, primarily due to supply-side disruption issues from Libya. Should there be a military conflict with Iran that spills into the strategically located Strait of Hormuz, oil prices may go parabolic.