London, 14 September 2010

An analysis of the S&P GSCI®, the world’s most closely followed commodities benchmark, suggests that global manufacturing is recovering more slowly than after previous recessions, an observation reflected by continued uncertainty of economists and investors about the strength of a global recovery.

To test the health of the post-recessionary environment, S&P Indices looked at the ratio of the S&P GSCI Industrial Metals Index versus the S&P GSCI Precious Metals Index.  How this ratio changes over time and compares to the ratios after previous recessions can be used to gauge sentiment for the state of the global economy. 

The industrial-to-precious metals ratio defines the critical interplay between these two commodity classes.  This interplay can be taken as an indicator of how industrial output compares to investor confidence because demand for industrial metals is a leading indicator for manufacturing output, whereas precious metals are seen as a safe haven investment.

The table below illustrates ratio variations in the S&P GSCI at the end of the last five US recessions and then six months thereafter: 

An analysis of these data shows that in June 2010 (six months after the US was officially declared to be out of recession), the ratio of industrial to precious metals was lower than at the same six month point in any post-recessionary period since 1983. 

The June 2010 ratio indicates that markets continue to view precious metals as a safe haven.  Demand for industrial metals remains insufficient to counter investors’ cautionary sentiment and bring the ratio back to levels we have come to expect following the US recessions in 1991 and 2001.

In August 2010, this ratio ended the month lower than in August 2009, at 2.1 versus 2.5, underlining the weakness of the current post-recessionary period and providing a shorter-term negative indicator for manufacturing activity worldwide.

Michael McGlone, Director of Commodity Indexing at S&P Indices, said: “Our analysis leads us to believe that the world economy is taking longer to come out of recession than it has done previously.  The fact that demand for industrial versus precious metals is lower than we have seen in all post-recessionary environments since the eighties is a reflection of how severely the effects of the last recession are still being felt.”

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