A Good Relationship Gone Bad...
The Dynamic Wealth Report
March 3, 2010
by Justin Bennett, Editor
Sometimes relationships hold strong for the long haul… and sometimes good
relationships take a turn for the worst.
Like a budding romantic relationship, the relationship between the U.S.
Dollar and commodities is complex.
You see, the financial media (CNBC and the like) will tell you a rise in
the dollar translates directly into cheaper commodity prices. They state
this with such certainty, many investors see this purely as cause and
effect. A rise in the dollar means a drop in commodities, and vice
versa…
The talking heads on TV are clearly rehashing their college economics
textbooks (if they even took economics). They’ll lead you to believe
that the dollar is a primary mover of commodities.
Now, to their benefit, basic economics will tell you that a falling
dollar is inflationary. As the value of the dollar goes down,
commodities priced in the dollar go up. Most things we rely on for
everyday life gets more expensive. It takes more dollars to buy those
commodities.
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A couple of weeks ago the dollar was rallying… but so did gold, silver,
and oil. And in the past week, the U.S. Dollar has been holding steady…
but the price of gold, silver, and oil is still going up. It seems the
widely accepted inverse relationship between the dollar and commodities
isn’t always true.
In fact, there are times when the dollar and commodities move in sync. As
one goes up, so does the other.
Take a look at this chart…
This is a chart of the U.S. Dollar plotted against the CRB Index. The
CRB is an index of commodities. It includes commodities from across the
board… gold, silver, oil, aluminum, cotton, orange juice, etc.
As you can see, the dollar and the CRB Index
moved in tandem for the
better part of 1999 and 2000. As one rose, so did the other.
Let’s fast forward to 2008 and 2009…
.GIF)
As you can see, the relationship changed. Once again, a fall in the
dollar translates to a rise in commodities. Looking at this chart, you
can see why many people believe the relationship is always inverse.
But the relationship isn’t set in stone… Over the last couple of weeks,
the dollar/commodity relationship has switched back to a
direct
relationship. Both are going up at the same time.
I don’t know how long this will last, but it’s important to keep an eye
on. Is it a sign of things to come? Well, it could be. It’s very tough to
predict how this will play out in the next few months.
When both the dollar and commodities rise, the markets are telling us
something…
It may be pricing in future inflation. It could also be pricing in
future lack of supply for respective commodities. (But more importantly,
maybe the smart money knows the gig is up for fiat currencies.)
We could be looking at higher commodity prices if stuff like gold,
silver, and oil continue to rally
or even hold steady on a strong
dollar. When the relationship switches back to inverse and the dollar
falls… commodities will rally from an already inflated price.
The bottom line is this…
The relationship between the dollar and commodities
can switch back and
forth. Individual commodities move on much more than U.S. Dollar
strength and weakness.
The individual supply/demand picture, as well as other underlying
economic factors, plays a larger role than media will lead you to
believe. Media presents these simple cause and effect relationships as a
way to justify movements in the markets.
Don’t assume what’s good for the dollar will
always be bad for
commodities.
• Oil (Over $80 a barrel)
Oil is peeking its head back above $80 again. Tensions with Iran have a
substantial fear premium built into the crude oil market right now.
Fundamental data such as inventory numbers suggests oil should be priced
lower than it is right now.
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