Commodity Bulls Should Be Grateful to the Fed

Commentators claim that commodity prices have recently risen because of the expectation that the Fed seems about open the money taps much further. Until unemployment diminishes and credit supply recovers, the real economy will not be able to absorb a lot of additionally created liquidity. Therefore, this extra money will largely flow to the financial markets.

In the past years, investors have increasingly regarded commodities as a normal part of a properly diversified portfolio. So if more money becomes available to the financial markets this will not just put upward pressure on stocks but also on commodity prices. The RJ/CRB index breaching resistance at 284 confirms this. Many analysts anticipate an additional upswing. They base this on a looser monetary policy by the worlds’ biggest central banks (with the ECB the notably exeption) and consistently high economic growth on the emerging markets in Asia and South America.

However, from a non-USD investor perspective I could equally explain the rise since June in the RJ/CRB index based on dollar weakness (see also the chart). One could argue that the expectation of further quantitative easing by the Fed has depressed the dollar, which “automatically” drives up commodity prices (always quoted in USD).

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