Commodities Drop on Inflation Concern, How unseemly?

``Gold has worked down from Alexander’s time…When something holds good for two thousand years I do not believe it can be because of prejudice or mistaken theory”- Bernard M.Baruch 1875-1965, American financer, stock market speculator, statesman and Presidential adviser

The plunge in bond prices, which has affected global equities have likewise prompted severe selling in the commodities market such as key bellwethers as Gold (down 3.83%), Silver (down 4.99%), Copper (down 4.25%), Crude Oil WTIC (down .49%) and Brent crude (down .68%) and the CRB Commodity Spot Index (down 1.38%).

Mainstream news accounted that rising interest rates would curtail demand for these items. We think such arguments as cockamamie.

Figure 5: Economagic: Rising Interest Rates, Falling US Dollar have been bullish for Commodities (particularly Precious Metals)

If inflation concerns had been a key factor in the recent selloff in the bond markets, as media portrays them to be, then we should have seen rising metal prices. Instead metal prices fell significantly, perhaps impelled by cross market leverages, where losses in margin accounts in one market have compelled collateral selling on the other.

In Figure 5, over the long stretch, we see a strong correlation of the US-dollar, Fed fund rates and precious metal prices where each time the US dollar falls (green line), despite rising interest rates (red line) we see precious metals (blue line) move higher (1977, 1985, 1993). Of course such correlation has not been in lockstep but the odds are given the same inflationary dynamics, history should rhyme.

We doubt if we are to likely see a furtherance of this phenomenon.