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Paragon Commentary

Futures File: Wheat & Gold

Feb 21, 2020

Wheat Plagued by Drought, Locusts

Wheat prices exploded on Tuesday, gaining over 20 cents per bushel as traders grew concerned about global supply threats. Australia’s crop is suffering due to dry conditions, and a plague of locusts is threatening crops across Pakistan, India, and China.

This winter saw a locust outbreak of biblical proportions in East Africa, ravaging crops in Ethiopia, Somalia, and Kenya. The insects are now swarming farther east, and Pakistan is suffering from the worst outbreak in over 20 years, prompting action from the United Nations. As the insects spread, they are beginning to threaten China and India, the world’s largest wheat producers. As a result of damage already wrought by the infestation, prices for food are soaring in those countries, and will likely force them to import wheat to meet their needs.

Domestically, American farmers are keeping wheat acreage steady, but increased demand from foreign buyers could leave us with the smallest stockpile in five years. As of midday Friday, March Chicago wheat futures traded for $5.56 per bushel.

 

Gold Blasts to Seven-Year High

Gold rocketed over $1650 per ounce on Friday, the first time since 2013. The yellow metal becomes popular during times of economic or geopolitical uncertainty, and the market has been feeding on turmoil for weeks. The dominant concern has been an increase in coronavirus cases in Beijing and outside of China. This is raising worries that the supply chain of goods and parts from China could be severely interrupted, slowing global growth

In response to the virus and looming economic slowdowns, more nations are stimulating their economies by lowering interest rates or reducing lending standards, pumping in “easy money.” These actions can lead to inflation, which often stimulates gold demand.

Meanwhile, U.S. stock markets are near all-time highs, which has prompted some investors to fear that equities are overvalued, stimulating demand for alternatives like precious metals. As April gold traded for $1648 on Friday, March silver stood at $18.52 per ounce.

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