Bernanke, the Dollar and Commodities

Ben Bernanke has come out with a now, now, there, there on the falling dollar:

The Federal Reserve is monitoring currency markets “closely” and will conduct policy in a way that will “help ensure that the dollar is strong”, Ben Bernanke said on Monday in rare comments on the US currency.

The Fed chairman also indicated that the US central bank would not ignore the impact of rising commodity prices when evaluating the outlook for inflation. He said he would not rule out using interest rates to combat new asset price bubbles, even though he did not see obvious mispricing in the US at this stage.

Hmmmm, no obvious mispricing. Does that include the oil speculative bubble of 2008?

Meanwhile Gold is through the roof, in part due to the dollar decoupling.


kitco gold


Which leads to this exceptional post on Econbrowser. James Hamilton has an analysis of commodity inflation and notes that commodities have risen an average of 37% in 2009. While gold is getting all of the attention, lead has risen 81.9%!

Below is a graph showing not a correlation to dollar devaluation, but a correlation of other commodities prices to....oil.


commodities correlated with oil
Src: Econbrowser


Hamilton gives the three explanations on why commodities are rising:

  • dollar devaluation
  • resurging economic growth outside the U.S.
  • commodities becoming an investment class (speculation)

Yet notes:

Since the start of this year oil prices have increased five times as much as the dollar price of a euro; see also Steve Gordon's graphs. While the depreciation of the dollar is part of the story, most of the explanation must be found elsewhere.

The evidence is strong that cause #3, speculation is causing a commodities bubble. Hamilton concludes with:

Policy-makers in the Federal Reserve have traditionally thought of inflation as a broad movement in all wages and prices, which to some extent is under their control, and viewed changes in relative commodity prices as outside their control. I believe that this is not the correct understanding of the current situation. Concerns about inflation, particularly on the part of foreign dollar-holders, are likely to show up first in the relative prices of internationally traded commodities. Insofar as these relative price changes can be destabilizing in themselves, it cannot be wise for U.S. policy-makers to ignore them.

Meanwhile you might remember this post, The Enron Loophole overviewing testimony on oil speculation. (Ah, doesn't $4 dollar gas seem like a long time ago?)

Which leads me to this post, The Global Oil Scam: 50 Times Bigger than Madoff:

$2.5 Trillion - That’s the size of the global oil scam.

It’s a number so large that, to put it in perspective, we will now begin measuring the damage done to the global economy in "Madoff Units" ($50Bn rip-offs). That’s right - $2.5Tn is 50 TIMES the amount of money that Bernie Madoff scammed from investors in his lifetime, yet it is also LESS than the MONTHLY EXCESS price the global population is being manipulated into paying for a barrel of oil.

We noted that banks were using TARP money to speculate in oil and Goldman Sachs bought an energy speculation firm.

While all of the news is Gold, Oil was up 3% in just one day.

As we can see, in an indirect way, oil is rearing it's ugly head on our economy. Commodities speculation is way beyond Bernanke, interest rates and the dollar. In fact we need to curtail these speculators who distort markets on critical commodities vital to the national interest and economy.



Which brings us to the Commodity Bubble talk

How can gold be in a "bubble" if it is merely doing what all the other commodities are doing?
Doesn't it make a bunch more sense to blame it all on a dollar devaluation rather than a commodity bubble?

It's a logical fallacy to say that because commodity prices are up faster than the dollar is down against the euro, that means that commodities are in a bubble. The logical fallacy here is that the euro is somehow static.
Doesn't it make more sense to believe that the dollar is simply falling faster than the euro is?

There is quantitative easing (aka competitive devaluation, aka monetization) everywhere, in every corner of the world. The world is being flooded with paper money.
It only makes sense that invetors would flee to commodities (aka real things).

flee to commodities

was the point of Hamilton, but I also noted that GS and others have been playing in speculative bubbles, but it has more to do with oil/energy than say all commodities.

But hamilton's point is how the ratio of the Dollar to the Euro doesn't account for the total rise in commodities...he is saying it's much more correlated to oil.

so he does call it investment, but I more amplified the speculation, because GS and others are moving into that, just like 2008, which truly was a speculative oil bubble.

So, maybe that clears up at least what I was trying to add
and also that I agree, you're right it does make sense to invest in commodities and my understanding is that by past terms the high of Gold was something like $1885, so it hasn't hit it's peak yet.

It's oil that I'm more pointing to. Also because Defazio and others have tried to get rid of the speculation on energy futures, market manipulation because energy is such a vital aspect of the entire economy and affects everything else.

gold midtowng

Did you notice that Bernanke's remarks has about an 8 hour effect on the commodities markets?

They went blasting back up today.

Oil man, the hidden future economic growth killer. I think a nice post on oil is due. We haven't had a long solid analysis in a while.

(yes I bought GLD earlier & am holding).