Most bullish commodity cases offer the seemingly irrefutable argument of “China” as a driver of higher prices in the weeks, months and years ahead. The logic is sound—demand for [Insert Commodity X here] is growing like gangbusters, and this trend will not only continue, but is likely to accelerate as China becomes a net importer for [Commodity X]. This increased demand, coupled with stagnant-to-declining supply for [Commodity X], will give prices a strong tail wind in the months ahead.
Sounds great in theory—but then again, so did communism. So I began to wonder if China’s economy was in fact serving as a reliable leading indicator for commodities. In theory, a strong Chinese economy should lead to higher prices for many of its favorite commodities, but an economic setback (like the one we saw in 2008) could send prices on a one-way trade heading south.
(And by the way, this is my first ever guest piece for our friends at HAI – so if you’d be so kind as to give the post a generous five star rating, I’d really appreciate it!)