About commodities

At the beginning of the week, the Fed sent out its vice squad to counter the evil notion that its monetary policy could be stoking not just the rise in stock prices, but also commodities. The squad consisted of Janet Yellen, vice chairman of the Fed's board of governors, and William Dudley, president of the New York Fed, which also gives him the title of vice chairman of the policy-setting Federal Open Market Committee. Yellen and Dudley reiterated the FOMC's official line that the surge in prices of key commodities, such as crude oil, would have only a "transitory impact." (Source: Barron's)

Commodities are rising because real interest rates are negative. Short-term interest rates are close to 0% and inflation is 2.7%.

History shows quite clearly that commodities including crude oil and gold have been stable when short-term interest rates were well above inflation. The demand from China and similar nonsense are an excuse to confuse the real issue.

Prior business cycles suggest that with inflation at 2.7$% short-term term interest rates should be in the 3%-4% range.

Commodities will continue rising as long as short-term interest rates are kept articially too low.

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest

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