The Commodity Story Update: Bull Horns or Bear Tracks

Commodities are used in the production of economic activity around the world, so a review of the markets that are sensitive to commodities helps to monitor the condition of important pieces in the global economy. Federal Reserve policy can influence prices of commodities, such as the price inflation observed in 2011, created by excess liquidity (monetary policy) finding value in commodities.

It's obvious that China has used their tremendous industrial and manufacturing capacity to increase employment and sustain the mandated GDP target of the government. The following comment, "Growth in China, the biggest user of everything from copper to cotton to coal, will slow to 8.5 percent this year, from 9.2 percent in 2011, the mean of 14 estimates shows" comes from a Bloomberg article discussing commodities. China is the largest customer of Australia, Brazil and other economies, including neighbor South Korea. The economy of South Korea provides an indirect window to their primary trade partner, China. The Kospi is a South Korean stock exchange and coincident proxy of economic change in China. It appears that the Kospi was hit hard in the beginning of August when Greece's debt default, and associated threat to the European banking system, became a reality. Prior to and since then, the trend has been slightly positive change.

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Commodity markets are generally priced in US dollars. The dollar strengthened in September, hurting buyers of commodities, a condition that repeated in November and December. If the dollar is strengthening, then commodities will become more expensive and that will be inflationary on prices of goods and services. A sideways trend would provide some unexpected currency stability. A weaker dollar would be welcome relief for commodity buyers and relieve concerns about inflation, as well as supporting prices of many stocks and precious metals. The 10 week moving average (gold line) illustrates a strengthening in the trend. The Fed FOMC is not likely to allow a sustained strengthening move in the dollar index without intervening. What if they do allow it? That will signal risk-off and a move to perceived safety.

The Commodity Story: Bull Horns or Bear Tracks

Commodities are used in the creation of economic activity around the world. So a review of the markets that are sensitive to commodities is one method of watching the condition of many pieces in the global economy and some individual markets. It is also worth noting how Federal Reserve policy can influence prices of commodites, such as the price inflation observed early this year created by excess liquidity finding value in commodites which are both a real asset and have scarcity.



The economy of South Korea provides an interesting window to their primary trade partner, China. The China economy is important for its consumption of commodities from Australia and Brazil and its purchase of material and services from other global economies. The Kospi is a South Korean stock exchange and coincident barometer of economic change in China. It appears that the Kospi was hit hard in the beginning of August. The timing suggests to Americans that the US Congress debt ceiling discussion impacted the Kospi. The weeks long discussion confirmed that the Congress is more dedicated to partisanship than to the good of the country and that may be part of the story. The beginning of August was also when Greece's debt default, and associated threat to the European banking system, became a serious outcome without intervention. That is a much larger economic threat for most of core Europe, at least at this point in time.



The commodity markets are generally priced in US dollars. Keeping the US dollar index in reference is helpful. The dollar strengthened in September, hurting users of commodities, a condition that appears to be repeating again in November. If the dollar is breaking out of resistance near 80, then commodities will become more expensive and that will be inflationary. A sideways trend would provide some currency stability that has been missing, and not a realistic expectation here. A weaker dollar would be welcome relief for commodity buyers and relieve concerns about inflation, supporting prices of many stocks and metals. The 10 week moving average illustrates the trend is suggesting a breakout through the 80 level. The Fed FOMC is also monitoring this movement. They are not likely to allow a big strengthening move in the dollar index with intervening. The problem is, what if they do allow it? That won't be fun to answer.