S&P GSCI Enhanced Commodity Index and other economic indicators

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Investors have always tried to understand what stage of the economic cycle the world economy is at. After all, different stages mean, first of all, different rules of the game, different strategies and priorities.

Copper as a leading indicator of the economy

Восстановление или рост экономики характеризуются увеличением потребления, повышением аппетита к риску и, соответственно, ростом спроса на рискованные активы, позволяющие получить большую доходность от инвестиций. И, наоборот, депрессия или спад – время, когда лучше умерить собственные аппетиты и задуматься над тем, как сохранить капитал, а не приумножить его. Снижение объемов потребления товаров и услуг в мире, развитие процесса «бегства от риска», поиск активов-«спасительных гаваней» – вот признаки данных стадий экономического цикла.

The need for proper perception of the rules of the game forces investors to use various indicators to identify the main signs of this or that stage of the economic cycle. Some are guided by macroeconomic indicators of the world's leading economies, some are trying to assess risk appetite by studying the dynamics of profitability bondsSome of them use quotations of some commodities as an indicator. For example, copper, the price dynamics of which, according to some analysts, makes it possible to determine more or less precisely the current stage of the economic cycle.

Weekly schedule futures The current economic recovery and growth phases of the global economy, which lasted from 2009 to 2010 since last year, have come to an end, and now a recession is prevailing, threatening to turn into a recession if last year's lows are renewed.

Index from Goldman Sachs

However, the use of a single commodity quotation is unlikely to adequately reflect the prevailing market priorities. To make the process of identifying the stages of the economic cycle more objective, Goldman Sachs in 2007 developed S&P GSCI Enhanced Commodity IndexThe "price" feature allows you to track the general situation on the markets by monitoring the prices of more than twenty commodities.

The proportion of components in the index is constantly reviewed, and at the end of 2011 its structure was as follows:

Crude oil (34.9%), Brent oil (16.5%), gasoil (7.1%), unleaded gasoline (5.2%), diesel fuel (4.7%), corn (4.5%), copper (3.1%) and gold (3%) were the largest shares.

At the same time, the share of fuel and energy decreased from 78.65% in 2008 to 66.7% in 2010, and then increased again.

Economic sense S&P GSCI Enhanced Commodity Index is that its decline reflects a drop in global commodity consumption, indicating a downturn or depression. Conversely, an increase in the index indicates a recovery in the global economy due to an increase in demand for raw materials.

Economic recovery or recession?

Current dynamics S&P GSCI Enhanced Commodity Index can be traced using the following graph.

As can be seen from the figure, the commodity market is currently at the level of multi-month lows. The main reason is the decline in crude oil prices since the beginning of the year by 16.5%, gas - by 31.7%, coffee - by 32.1%. In general, the most weighty component of the index declined by 12.3%. Among industrial metals, nickel (-9.4%) and aluminum (-8%) suffered the most so far.

Nevertheless, analysts and the developer itself are predicting a speedy recovery S&P GSCI Enhanced Commodity Index. So Goldman Sachs expects it to grow by 29% by the end of this year. This means that the recession in commodity markets is coming to an end and we should expect growth of both individual components of the index and the world economy as a whole. Whether it is so, time will show. I would like to clarify to what extent, in your opinion, this index can reflect the true state of the world economy? Is it more objective than, say, copper quotes? Is it worth using in order to understand the rules of the game?