by Jerome Kuseh

Yahoo reported yesterday that gold prices had hit a five and half year low of $1,077 an ounce. Gold prices have been falling over the years as chart 1 below shows.

Chart 1: Gold Prices since 2006 (USD/oz)

As can be seen gold prices have been falling since 2013. The peak price was US$1,828.5 per ounce on August 31, 2011. It was US$1,093.66 per ounce as at the time I was writing this.

Oil prices are also falling with Brent crude selling at US$53.47 per barrel at the time of writing this article. Keep in mind that the recent mid-year budget review had projected oil to sell at US$57 per barrel. But we will get to that later. Check out the oil prices in chart 2 below.

Chart 2: Oil Prices since 2008 (USD/bbl)

Chart 3: Cocoa Prices since 2008 (USD/Tonne)

Finally chart 3 shows the prices of cocoa beans per metric ton since 2008. It can be observed that the price took a huge dive in 2012 and started rising after 2014.

Some of the reasons that explain the price volatility of the commodities are as follows:

1. US economic recovery and a stronger dollar. The economic recovery in the USA since the recession has occurred as the EU, China and Japan have struggled. This has made the US dollar stronger in relation to other currencies. The value of the US dollar has an inverse relationship with commodity prices – a rise in the value of the dollar leads to a fall in prices of commodities. A partial explanation for the inverse relationship is that as commodities are priced in dollars, a stronger dollar would mean you need less dollars to buy them.

2. Upcoming hike in US Fed interest rates. The US Federal Reserve has noted that the economy is recovering and unemployment is falling so it will increase interest rates before the end of the year. This increase in the interest rate will drive investors towards US debt and the prices of alternative investments like gold will drop as a result.

3. Slowing Chinese Market and Stock Crisis. China has had it tough this year. Apart from recording its slowest growth in six years, the country’s stock exchange is in crisis with the Shanghai Composite Index falling by 8.5% yesterday, the second largest fall for the country in history. Apparently the extraordinary growth in China’s stock prices before the crash in June was due to the government encouraging lending to barely literate people to buy shares, thus driving share prices higher. This crisis and China’s low growth means that China no longer demands as much oil as before and it is no more stocking on gold as it was before. These have affected gold and oil prices.

4. Increased Oil Production. The rise in oil prices in the 2000s caused by China’s demand motivated oil companies in the USA to be more innovative in increasing production. Methods such as fracking and horizontal drilling have greatly increased how much oil USA adds to global production. In 2014 US oil production was 33% higher than in 2000. The rising production drove oil prices down. For fear of losing market share, OPEC chose not to reduce production and thus prices have continued to fall. After the lifting of sanctions on Iran due to the nuclear deal, Iranian oil is expected to significantly flow in 2016 and therefore a significant rise in the price of oil is not expected anytime soon.

5. Political Stability in the Ivory Coast. As can be seen in chart three, the price of cocoa fell sharply from 2012 after political stability had returned to the cocoa producing nation of the Ivory Coast.

6. Shortfall in Cocoa Production in Ghana. Cocoa prices are on the rise for the wrong reason – a failing crop in Ghana. Bad weather and a lack of pesticides means that Ghana will only produce 700,000 tonnes of cocoa in the 2014/2015 season which is far below COCOBOD’s target of more than one million tonnes. This has driven the global price of cocoa up.

So what does this all mean for Ghana? Let me bring back a chart I used in my last post that attempted to take a superficial look at the relationship between our GDP growth and commodity prices.

Chart 4: Gold, Oil, Cocoa, GDP 2010-2014

Chart 4 shows year end percentage changes in the prices of oil, gold and cocoa plotted against Ghana’s GDP growth rate.

As affirmed by Finance Minister Seth Terkper in a recent interview with Citi FM and Radio Gold, our major foreign exchange earners remain gold, cocoa and oil. The recent mid-year budget review showed that for the first five months of the year, the total value of exports had fallen to US$4,816.7 million, 17.8% lower than over the same period in 2014. Even though the volume of oil exports increased by 6.7% to 15.6 million barrels over the same period in 2014, the value of receipts fell from US$1,589.7 million to US$875.7 million, a decrease of 45%! Gold exports were US$1,360.9 million compared to US$1,881.9 million for the first five months of 2014, a fall of 28%.

Imports were also down due to the fall in oil imports by 50.7% to US$761.2 million. However, the overall fall in imports was not enough to offset the fall in export revenue. The trade balance recorded a deficit of US$670.7 million compared to US$303.0 million recorded during the same period in 2014.

Despite marked improvement in domestic revenue and the resumption of donor support, a further fall in commodity prices means that the budget deficit may be worse than the revised target of 7.3% of GDP. Growth projection for the year has already been revised down to 3.5% from 3.9%.

Lower than expected foreign exchange earnings may also hurt the cedi. The currency fell by 8.9% due to the revision in fiscal targets and it is expected to get worse. With 2016 being an election year, there is much scepticism about how well government will keep to the plan for fiscal consolidation. Therefore performance this year is crucial. For now, we can only be hopeful.