Commodities bulls betting on further easing from major central banks to revive sagging prices may be setting themselves up for disappointment.
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According to commodities analyst Dominic Schnider, loosening monetary policy may release more liquidity into financial markets but that’s not going to be the main driver of prices. Global demand continues to be the key driver of the natural resources sector, and as long as appetite from China – the world’s biggest consumer – remains weak, prices will remain soft.
“At the end of the day, what needs to happen with cheap monetary policy, or loose monetary policy, is that demand gets really activated,” Schnider, Head Commodity Research, UBS Wealth Management told CNBC Asia’s “Squawk Box” on Tuesday.
“And if we don’t see demand getting activated at the end, you are not going to see the kind of inflation that you want.”
Some of the liquidity that was added by central banks in recent easing moves has been kept in banks and “not unleashed into the market and into credit activity,” he said, adding that there is no reason to believe that the next measure will be any different.
In fact, Schnider is not expecting any quantitative easingat all from central banks. The most that will happen is monetary policy from China, which still has the room to cut reserve requirement ratios or interest rates for its banks, after two surprise rate cuts in June and earlier this month.
Interest rates set by the European Central Bank, Federal Reserve and Bank of England are already at all-time lows and the Bank of Japan has been hesitant to boost its asset-buying program after setting aside about 40 trillion yen ($505 billion) as Governor Masaaki Shirakawa has repeatedly insisted that that the policy is not sustainable.
U.S. Federal Reserve will hold its next meetings on July 31 and August 1, with bond firms polled by Reuters seeing a 50 percent chance that Chairman Ben Bernanke will announce another bond buying program. The Fed had held off on another round of asset purchasing in June.
In the meantime, a lack of any real demand will curb prices for commodities from base and precious metals and grains until at least the fourth quarter, Schnider said. Gold, for example, is “heavily oversupplied” and will trend lower.
Schnider’s views counter those of commodity bulls like Jim Rogers, who believes that quantitative easing will drive up the value of hard assets. The renowned commodities investor is long real assets, such as gold, silver and agricultural commodities.
Commodities Spooked by Europe, Global Growth Concerns
A combination of Europe’s debt crisis and concerns over global economic growth have triggered a selloff in risk assets like commodities.
Spot gold has fallen about 17.8 percent since touching an all-time high of $1,918 in September last year. It traded unchanged at $1,577 an ounce in early Asian trade on Tuesday. Copper has declined about 16 percent this year and is now trading at $3.37, while iron ore, the main material in steel, is trading at an 8–month low of $123.60 a metric ton.
It's equally bearish in the oil markets. Fresh worries over Spain saw crude prices tumbling for a second straight session on Monday. Brent September crude fell more than 3 percent to $103.26 a barrel and U.S. crude fell 4 percent to $88.14. Year to date, Brent is down about 9 percent, while Nymex crude has fallen 15 percent.
Yudee Chang, Principal and Chief Advisor of ACE Investment Strategists, a trading and fund management firm based in Virginia, U.S., says beyond weak demand, a flood of supply will keep oil prices soft. He expects oil to fall “below or around $50 per barrel” over the next two years.
“I really believe that over a longer-term basis, let’s say the next 2 years, there’s going to be so much supply coming on line,” Chang told CNBC Asia’s “Squawk Box”. “However, over the short term, there are a lot of headline news events, a lot of geopolitical events that will make energy prices oscillate and chop its way down.”
In the short term, oil supply may be disrupted by turmoil in Syriaand tensions between Iran and the West over Tehran's nuclear program. Investors could use the volatility to buy high and sell low, Chang said.
- By CNBC's Jean Chua.