A glance at a commodity futures chart shows a dramatic shift of momentum in the last few months. Every category has seen massive jumps, from cotton to sugar to silver. Crude oil futures appear to be making another bullish run up towards $100 per barrel, while gold futures have decisively broken the $1,400-per-troy-ounce
Grain futures such as wheat and corn are up significantly as well – and it won't be long before the higher prices of feed have an effect on cattle futures and other livestock.
For many, there's no doubt about both the cause of the move and its potential future direction.
"The bull market is on in commodities," Michael K. Smith, the president of T&K Futures & Options, told Bloomberg News. "[With] this last quantitative easing, there's no doubt in anyone's mind now that we’re going to have inflation. The best hedge for inflation is dollar-denominated commodities."
Smith's views sum up the opinions of many traders – but with commodities, there's always supply and demand to consider. In some cases, it's easy to assess how much of a role currency speculation has played in affecting the price of an asset.
For instance, gold and silver are almost entirely investment plays. There hasn't been a sudden surge in industrial or consumer demand for the precious metals – but investors, particularly the inflationistas, see those assets as a haven against the efforts of central banks to devalue national currencies.
On the flip side, it's difficult to say that much of the appreciation in corn or wheat has been driven by currency concerns. Some commodity futures traders or brokers may be buying into the grain futures to hedge against a falling dollar, but there's the massive impact of Russia's drought, which deprived the global markets of a hugely important source of grain. The resulting shortfall in supply created a completely predictable surge in price.
Cotton, too, is in a state where supply is consistently falling short of demand. QE measures from the Fed, the Bank of Japan and the Bank of England helped stoke the fires a bit, but a bigger driver may just be the frantic buying of cotton by Chinese mills, as well as the loss of millions of bales of Pakistani crops.
The rhetoric also has a tendency to get political – and the recent Tea Party and Republican victories have given those politicians who fear inflation and resent the Federal Reserve a new platform. No less a conservative icon than Sarah Palin called out the latest quantitative easing and linked it to the rising price of food and goods in the grocery store – and got into a spat with the Wall Street Journal's Real Time Economics blog for her troubles.
Inflation and its measurement is a highly politicized topic; critics often allege at the Consumer Price Index, as it's commonly stated, is misleading because it leaves out volatile food and fuel prices. In fact, one iteration of the CPI does measure those prices – but some see the measures that are used as misleading and manipulated to make inflation look lower.
Of course, the rising price of bread might not have anything to do with currency at all if it's caused by a Russian grain embargo. But it's difficult to piece together how much each effect moves the market, and even trickier to do so in a coherent political statement.
There's no doubt that QE and a falling dollar have stoked the commodities rally. But a trader following just the Fed's announcement could find themselves unpleasantly surprised when fundamentals shift.
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