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There’s this chart going around courtesy of the San Francisco Fed that supposedly shows how commodity prices are not being at all influenced by Fed policy and speculators. In short, it shows a near perfect correlation between world industrial production and commodity prices.

At first glance you might think: “gee, this really is entirely fundamentally driven and the Fed is having zero impact on everything.” But when one looks at the chart closely one notices that the scales are entirely manipulated to give the appearance of a close correlation. When one backs out the scaled manipulation you get something that looks like this:

(Click chart to expand)

All of the sudden it looks like commodities and world industrial production have little to no correlation. What’s the conclusion? Don’t believe everything you see – especially when it comes from an outfit whose job it is to protect Fed policy at any cost.

Of course, this doesn’t mean that all of the conclusions based on the original chart are wrong. Indeed, demand really is having an important impact on prices. And the arguments about the Fed “money printing” not leading to commodity inflation are all true – as I’ve shown in detail the Fed isn’t really flooding the economy with money. More importantly, the arguments backing the China + “money printing” + growth = commodity boom, are likely all close to spot on. But to trot out this chart as a defense for the Fed and conclude that speculation is playing no role in the current run-up in commodities is sheer nonsense. Especially when we have visual proof that speculators are hoarding commodities due to their belief in future higher prices. The Fed is intentionally manipulating investor expectations of inflation and it is working. Whether it is having a positive or negative impact on the economy is the real meat of the debate and that’s for another discussion.