The accelerating bull market in commodities may be a boon to Canada if it can be sustained, but some of the country's top economists suspect the stampede is a market mirage.
"They've gotten a bit carried away," said Peter Buchanan, senior economist at CIBC World Markets. "There may be a reality check coming for many of these commodities in the next few months."
The numbers, unquestionably, scream "bull": Thomson Reuters/Jefferies CRB index, the global benchmark for the commodity market, rose to a 25-month high Tuesday, extending its streak of gains to nine consecutive trading days. The index has risen in 18 of 22 sessions over the past month, during which time the index is up 8 per cent.
Those gains are just part of an even bigger upswing in the commodity market, which has soared 22 per cent since late August. Spot gold prices touched an all-time high of $1,420.90 on Tuesday before falling 1.14 per cent to $1,393. Copper is threatening its record peak and silver hit a 30-year high before falling 3 per cent. Oil hit a two-year high of $87.63 before falling to $86.40.
All of which, taken at face value, is a big positive for the Canadian economy and the resource-heavy Toronto Stock Exchange, roughly half of which is composed of natural-resource companies. But, experts say, there's a big asterisk.
Economists and market strategists say the commodity price resurgence has had much more to do with U.S. monetary policy than with supply-and-demand fundamentals.
Anticipation of the U.S. Federal Reserve Board's latest quantitative easing program drove down the U.S. dollar, the currency in which commodities are priced globally, and eased investors' perception of financial market risk, both of which supported higher commodity prices. These effects were accelerated by the long-anticipated announcement of the QE program by the Fed last week.
"It's something we're obviously watching," said senior economist Derek Burleton of Toronto-Dominion Bank. "But am I going to bank on these recent gains being sustained? I'm cautious."
More than 50 per cent of TSX earnings are commodity sensitive, hence rising commodity prices are very good for TSX earnings per share. Vincent Delisle, Scotia Capital
At the same time, the global economic outlook has not improved appreciably. Economists still forecast global economic growth of a historically modest 4 per cent in 2011; growth in North America is forecast at an unimpressive 2.5 per cent, while the euro area will be lucky to manage 1.5 per cent.
Should the commodity prices prove more resilient than their detractors expect, though, they could prove an elixir for the Canadian economy and a driving force for domestic stocks.
"Rising commodity prices are good, but [the rally]needs to be sustainable and supported by robust GDP growth, not solely U.S.-dollar-driven," Scotia Capital portfolio strategist Vincent Delisle said in an e-mail Tuesday. "More than 50 per cent of TSX earnings are commodity sensitive, hence rising commodity prices are very good for TSX earnings per share."
Corporate profits are one of the largest components of Canadian gross domestic product - accounting for roughly 11 per cent of nominal GDP in the second quarter of 2010 - which implies that a boost in profits from a sustained commodity rally could translate to higher-than-expected GDP growth next year.
However, Bruce Cooke of Statistics Canada noted that the so-called "real" GDP numbers - those most closely tracked by economists - exclude inflationary effects, and thus wouldn't be directly affected by the rise in prices for commodity exports, as those price effects are filtered out.
Impact on Economy
Higher commodity prices undoubtedly have, in less direct ways, "had a tremendous amount of impact on economic growth" in recent years, he said.
"The way that's felt is in all the other aspects of the economy," he said.
The higher prices and resulting rise in profits have fuelled development of mines and energy projects that otherwise wouldn't have been developed; created jobs and fuelled consumer demand; prompted infrastructure and housing construction.
"Those are still actual dollars that exist in the economy - and they still get pushed around," Mr. Cook said.
But McLean Budden's Robert Spector cautioned that even the apparent gains from the recent commodity rally will be mitigated by the fact that it has come on the back of a weakening U.S. dollar - and, by extension, a rising Canadian dollar, which is up almost seven cents (U.S.) since the end of August.
Canadian-dollar profits from these higher commodity prices are considerably eroded by the loonie's rise.
He added that higher commodity prices, if sustained, would also be a negative to domestic consumer demand in both Canada and the U.S., due to higher costs for many resource-sensitive goods and services.
"There are a lot of layers that we need to be aware of," he said.