Gold, Commodities and Procurement Strategy -- A Big Disconnect

We scanned a familiar headline in The WSJ earlier today that gold was up yet again. Specifically, "Gold for December delivery, the most actively traded contract, rose 0.2% to $1,144.10 an ounce ... [and is] set to end the week higher by more than 2%." And according to Kitco, the current gold spot price was up 54.22% for the past 12 months as of 12:55 PM CT on Friday. But where does this particular gold rush leave other commodities? Not to mention actual demand from a manufacturing and industrial standpoint? In our view, there's never been a greater disconnect between the price of gold as an investment vehicle and perceived safe haven relative to true commodity demand in the industrial markets.

Now, we're not commodity experts at Spend Matters. And we'll leave specific discussions concerning ferrous and non-ferrous musings to Spend Matters affiliate site MetalMiner. But what we can say is having spoken to a number of commodity buyers and sourcing consultants in the past couple of weeks, it does not appear that actual demand is coming back anywhere near as quick as commodity prices have climbed. Yes, there is a newfound demand for cost reduction (as a nice spike in many management consultant's chargeability in the sourcing area this past month would suggest). But the current volumes simply aren't there yet. Nor are the new orders.

The ISM new orders numbers point to this as well, suggesting a second month of declining growth rates. Moreover, speculative and investment-focused commodities such as gold appear to be in an entirely separate and disconnected class than those most consumed in industrial production. But where does this leave commodity prices and the rest of us? We'd argue that procurement organizations need to separate out the current gold and speculative commodity hype from reality and look at actual demand to help guide strategies going into 2010. After all, even if you believe in the China growth miracle defying economic gravity, how many more unoccupied cities like this can they build to keep commodity demand up? We suspect not many.

- Jason Busch
- William Busch