Bubble Bursting For Commodities?
Although the decline in the price of oil is getting most of the attention, commodities have been retreating across the board for the last two weeks.
“People have gotten very worried about demand for commodities because of this global meltdown,” said Michael K. Smith, president of T&K Futures & Options in Port St. Lucie, Florida. “If all these major economies are going to slow down, people think that’s really bad news.”
When the dollar started it’s free fall last year and inflation started to rear it’s ugly head, we saw large amounts of institutional money pouring into the commodities market. Commodities were one of the few outlets for investors that provided decent returns with the bond, stock and housing markets all in decline.
So much money went into these markets over such a short period of time, a speculative bubble couldn’t help but form. Unfortunately with the economic troubles that began in this country slowly spreading around the globe, that bubble is starting to burst.
On one hand it seems as if some of the inflationary pressures are starting to abate, which is the good news. On the other hand, the reasons for this is not because conditions are improving in this country but that the rest of the world is falling to our level.
For example the dollar has been gaining in exchange markets recently but instead of thinking of the dollar as growing in strength, it’s more like foreign currencies are weakening with their respective economies. Consider that interest rates in the U.S. are comparatively lower than much of the world, which serves to drive down demand for dollars.
If commodities continue their fall, it would allow the Fed to maintain interest rates at their current level and allow more time for financial markets to recover.
