Business cycles

Commodities follow both seasonal patterns and general business cycles like the one below:

A common business cycle

Commodity prices during expansion

In a period of strong expansion, consumer demand is high, uneployment low, and wages increase more than under normal circumstances. This increases inflation, which, in turn, tend to rise most commodity prices. In addition, high economic activity also means an increase in demand for commodities as many commodities are required as input to companies’ production.

The increase in inflation require the central bank to raise the interest rates, in order to prevent the economy from overheating. When the increase in the interest rates take place, the expansion reaches it’s peak before growth slows, since investments decline due to higher financing costs.

With a lag of several months the higher real interest rates reduces the demand for commodities which in turn leads to lower commodity prices.

Commodity prices during recessions

During recessions commodity prices are expected to behave corresponding: at the beginning of a recession, the demand for commodities are low, which reduces commodity prices. When the real interest rates have been cut by the central bank a few times, and a economic turn-over is in sight, commodity prices are expected to gain again.

Seasonal patterns for raw materials/commodities

Commodities follow a seasonal pattern in terms och supply, demand and prices – some commodities more predictable then others. Below you find some common seasonal patterns for highly traded commodities:

  • Coffee: A trade in coffe can be done by selling the last week of May and hold until August, after a seasonal high in May.
  • Cruide oil: Tend to fall in the beginning of April, and then rally through mid-May. Reason: Still demand for heating oil and diesel fuel in northern USA, while many refineries shut down and switch operations during this time a year.
  • Gold: Often increase in price from mid-summer until beginning of September.
  • Natural gas:  Seasonally, natural gas prices go up from July to end of October. Reason: Summer air condition heats up natural gas.
  • Soybeans: Mid-February to end of May tend to be a good season for soybeans. During the last 42 years, prices advance 4 times out of 5.