Wednesday, September 26, 2012

Commodities update

As this chart shows, non-energy spot commodities (CRB Spot, white line) have been rather strongly correlated with equity prices (S&P 500, orange line) this year. Are equities and commodities rising because the economic fundamentals are improving? Or is it because monetary policy has become easier?

That's a tough call, but I'm inclined to think that commodities are up mainly because the economic fundamentals are improving, and easier monetary policy is acting as a tailwind. If the action were all about monetary policy, then gold should have been rising and the dollar should have been falling beginning in early June. However, the dollar didn't start weakening until August, and that was also when gold started rising.

This next chart puts the recent commodity price action in a long-term perspective. The bounce in prices since last June has been relatively modest, and that fits in the context of a modest improvement in the economic fundamentals. Stocks are not on a moonshot by any stretch. If anything, what we have seen in recent months is a very minor improvement on the margin in economic fundamentals that has received a modest boost from easier monetary policy.

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