Wednesday, March 05, 2008

Dollar down, commodities up

Well, if yesterday's action in the commodity markets threw you, then today we're back on track with the main trend. The dollar is down against the euro (to a record of $1.53), and commodities are up. It seems, for now, that the trends for a lower dollar and higher commodity prices are intact.

Yesterday saw declines in some of the most actively traded commodities, with oil, gold, and corn falling from record levels on worries of a US slowdown.

But with today's action, we've seen a reversal of yesterday's declines. Oil, gold, and corn are now at new highs, and a weaker dollar is said to be fueling this rise.

Here's more from Bloomberg:

"Crude oil, gold and corn prices surged to records, leading a rebound in commodities on renewed concern that a slumping dollar and lower borrowing costs will spur inflation and increase demand for raw materials.

The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts jumped 39.11, or 2.6 percent, to 1,546.74 at 1:20 p.m. New York time. The gauge has jumped 21 percent this year, reaching a record 1,573.8381 on Feb. 29.

The prospect of reduced borrowing costs in the U.S., where the Federal Reserve has cut interest rates five times since September, will continue to drive the dollar lower and boost prices of all commodities, said Michael Pento, a senior market strategist for Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.5 billion.

``Commodities are responding to the weaker dollar, and this trend will continue,'' Pento said. ``We're creating too many dollars. It's a secular downtrend in the currency that's going to boost commodities.''

The idea that commodities are being driven higher by a weaker dollar has been a popular sentiment in recent weeks. In fact, some of the more recent stories on rising commodities have stressed the theme of commodities as an inflation hedge. And we're not just talking gold and the other precious metals; the entire "asset class" is now seen as hedge for inflation.

To illustrate, here's another passage from the same Bloomberg article:

"Commodities have surged this year as the U.S. Dollar Index, a weighted measure against the euro, yen, pound and three other major currencies, slumped to a record.

``People are just jumping back into commodities,'' said Donald Selkin, a director of equity research at Joseph Stevens & Co. in New York. ``Everyone has this inflation-hedge mentality.'' "

We also saw this sentiment expressed in a seperate article on the price of base metals. Amazingly, it seems even the industrial metals are now being viewed as something of an inflation hedge.

Is this a sign of things getting a little out of hand? MF Global analyst Edward Meir offers his view:

“What we have been seeing in metals of late (and in commodities in general), is that the group is being viewed not as a proxy of global industrial demand, but instead as an inflation hedge and a lucrative investment choice for portfolio diversification,” Mr Meir said.

“How much longer this can continue is the big question, but we would suggest that the upward spiral evident in a variety of commodity markets, including metals, is assuming bubble-like proportions.”

You can find more of Meir's views on commodities in this interview with Hard Assets Investor.

That's it for now, but be sure to join us tomorrow. We'll have an update on recent action in the platinum and palladium markets, as promised earlier in the week.