Thursday, June 17, 2010

Another high for gold portends higher commodity prices

Gold today closed at yet another new high against the dollar. The euro has jumped against the dollar of late, so gold is about €30 off its highs against the euro; ditto for the yen. The big story, however remains that all currencies have lost significant ground to gold in recent years. That all currencies have lost so much value against a gold benchmark at the same time overwhelms the movements of one currency vis a vis another.

As this next chart shows, gold is highly correlated with commodity prices (0.86 over this 30-year period), and gold tends to lead commodity prices. I've heard many arguments for why gold is marching to the beat of its own drummer these days (e.g., the Chinese and the Indians are flush with money and can't help but spend it on gold), but I would argue that it is very hard to dismiss gold when you consider how gold and commodities have tracked each other over the decades. Commodity prices have dipped a bit since April, but they are already on the rebound, and this chart suggests they could have substantial upside remaining. This would add significant fuel to the inflationary pressures that are already building (see earlier post).


seekingtraceevidence said...

Commodity prices have been high for 12mos with yet 7-9mill unemployed. This is not use. It is currency speculation by HFs which will not hold up in my opinion.

Benjamin Cole said...

"Greenwich, Connecticut-based Amaranth collapsed after losing about $6.6 billion on wrong-way trades in natural-gas futures. It had controlled more than half of the U.S. market for the commodity before it failed, according to a Senate report from June 2007. Amaranth agreed last August to pay $7.5 million to settle allegations from U.S. regulators that it tried to manipulate the market for natural-gas futures." --today, Bloomberg BusinessWeek

Commodities are now speculative markets. When a single player buys more than one-half of a market, you gotta wonder what is going on.

The NYMEX oil futures market is also very dubious. You have OPEC cartel members with enormous sovereign wealth funds, who also can influence physical supplies. Putin and Russia would be stupid not to try to game NYMEX markets higher.

Gold is a mania in China right now.

If investors fear collapse of even sovereign debt, and there is flight to gold, then that is not an indication of monetary policy or inflation.

Actually, the long-run trend of manufactured goods and commodities is that they become cheaper--man becomes better at extraction, and fabrication. I think commodities will be cheaper in 30 years, not more expensive.

There may be a few speculative bubbles along the way.

Scott Grannis said...

seeking: my theory is that strong commodity prices are due to a bit of both: strong use and speculation (i.e., easy money).