Beaten down commodities prices are unlikely to get much relief from an expected 1 trillion euros of monetary stimulus in Europe, as the plan is very different from the US version several years ago that gave raw materials a huge boost. The European Central Bank last week launched a government bond-buying programme that will pump new money into a sagging euro zone economy.
This should indirectly buoy commodities by boosting economic growth and confidence, stimulating demand for raw materials used in sectors such as construction and automobiles. But the injection of liquidity is also designed to weaken the euro, indirectly boosting the dollar, which is largely negative for commodities priced in the US currency because it makes them more expensive for non-dollar holders.
The 19-commodity Thomson Reuters/Core Commodity CRB Index rallied by more than 50 percent during the 29 months following the launch of quantitative easing (QE) in the United States in November 2008. Since then, the index has slipped just below levels seen when the Federal Reserve launched its QE programme, with the move down hastened by tumbling oil and growth concerns.
"Overall it's hard to identify a particularly strong channel whereby this (QE) is going to boost commodity prices," said Julian Jessop, head of commodities research at London-based financial consultancy Capital Economics. "But at the margin, the effect has to be positive. It's better that the ECB did something than nothing. It does provide a bit of a lift to confidence."
Injecting cash into the US economy had a dramatic impact in the depths of recession, but while Europe is struggling, it is not in such a dire situation, Jessop said. The US exercise also aimed to unfreeze the US mortgage market, which led to credit easing, sending floods of cheap money chasing a range of risky assets including commodities. The ECB will buy government bonds, resulting in financial institutions swapping into very similar assets - cash instead of bonds which already had yields at very low or negative yields. There is also less confidence in QE after subsequent bouts of US stimulus failed to have the same impact, said Matthew Turner, analyst at Macquarie in London.
"When the Fed launched the first QE, people thought it would lead to inflation but it didn't so people are more sceptical this time around," he said. "The ECB is trying to increase economic activity, but for most commodities, Europe only accounts for 10, 15, 20 percent of demand."
The ECB's sovereign bond purchase programme was the latest salvo in its battle against deflation. Platinum has the best odds of being given a shot in the arm from QE since demand for catalytic converters, one of the precious metal's main drivers of consumption, is strongest in Europe, he added.
The government in China, the powerhouse of commodities demand, is engineering a gradual slowdown of economic growth, while a weak oil price is depressing cost curves and weighing on prices. "China has not, and is unlikely to subscribe to wholesale money printing," said Nomura analyst Matthew Kates in a note. "Non-dollar denominated QE is likely to push the US dollar even higher, thereby feeding through to lower commodity prices."