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Friday, October 1, 2010

Why are Commodity prices rising again?

Remember when commodities peaked in mid-2008 just before the financial crisis and then crashed (sort of), along with the stock market? Well, the CRB index, which is a good proxy for commodity prices, is right back to where it was in mid-2008. Yet, take a look at the Baltic Dry Index, which is a good proxy for world economic and trade activity. It is still mired and hasn't recovered. So why is the correlation no longer valid? My take is that commodities are rising in terms of a weakening U.S. Dollar and to a degree, against almost all currencies as a reflection of currency debasement. One of the more obvious examples is Gold, of course. Gold is really the currency of currecies and so far no one has figured out how to easily debase it. You can't print more of it. Quantitative Easing (QE) techniques won't produce more gold, only more dollars. So there you have it. Since it isn't industrial demand that is pushing prices up this time, then according to the CRB basket of commodities, dollars are just fast becoming worth a lot less, that's all.