Commodities Meltdown as Dollar Surges

The accompanying three-month chart illustrates a steadily strengthening US Dollar (UUP) along with a broad-based meltdown in the prices of commodities. The U.S. Oil (USO) and Natural Gas (UNG) Funds are down over 20% and 40%, respectively, while SPDR Gold Shares (GLD) and PowerShares DB Agricultural Commodities (DBA) are both down over 10% in the last three months. The correction in commodities reflects concerns over a global economic slowdown, a strengthening U.S. Dollar (with the Euro slipping below the $1.40 mark), and a drastic run-up in prices which proved to be unsustainable. London crude oil is trading this morning below $100 despite an output cut by OPEC and looming Hurricane Ike which is expected to make landfall Saturday morning in the Houston-Galveston area in Texas -- threatening damage to oil refining and natural gas infrastructure in the Gulf Coast region.

Comments

[bowman711:]

As I was driving around today, I was thinking about all this 'Alice in Wonderland stuff,' this sudden seemingly inexplicable drops in commodity prices could be preparation for another FOMC rate cut. There are more and more signs of recession, which is toxic any time but especially before an election. But, the Fed can't lower interest rates at a time when everyone knows that inflation is eating away at their pocketbooks.

So, this may be a coordinated attack on anything by which the value of the dollar is commonly compared with so the Fed can say that inflation is dead - or at least in check - so they can stimulate the slowing economy with another rate cut. Few think that the Fed would cut rates next Tuesday, but how about the October 28-29 meeting? A cut then would probably send the stock market soaring . . . just a week before the U.S. election.

Just a thought.

2008 Sep 12 08:52 AM

[Rocknbob:]

to bowman 711: you make a lot of sense ; people get a false sense of security just before the election, benchmarks soar for a while, then a reversion to a sinking dollar and higher comm prices may take over , maybe even before years end...

2008 Sep 12 09:07 AM

[bowman711:]

I should add that I think a more likely explaination of what is happening to commodities than trying to influence an election is this:

As everyone knows, the Chinese (and others in a similar position) hold hundreds of billions of the U.S. debt. They also see what is happening in the 'credit crisis' and that the U.S. is facing it by printing untold more dollars, thus devaluing every dollar-denominated entity already held in by the Chinese. Not wanting to see further erosion of their wealth, they have let the Fed and the Bush government know that they want out of dollars.

A sudden dumping of hundreds of billions of dollar debt would likely cause the end of the 'full faith & credit' in the U.S. dollar. [The Euro would likely take its place as the world currency.] So, to save the dollar, the Government might have made an agreement with the Chinese to supress commodities so the Chinese could exchange their dollar for commodities. The 2008 G8 Foreign Ministers Meeting was in late June, and it seems that the real attacks on commodities started a couple of weeks later. Coincidence? Maybe not.

2008 Sep 12 09:20 AM

[Kelly Liebe...:]

MSN reported yesterday that China is quietly buying gold. If that is true, and most of us believe that is the case, that the Chinese are "exchanging" dollars on a paper trail known only to a few in the know, than why worry about the temporary drop in commodities?

When everyone else wakes up and realizes that they have been duped by our own government they will begin to dump the dollar and follow the Chinese... It is no less than criminal but what else is new?

2008 Sep 12 11:35 AM

[User 30121:]

Gold stars for bowman711 and Kelly Lieberman! Right on target!

2008 Sep 12 12:53 PM

[OldLimey:]

bowman711: I think you're spot on with your first comment, but I'm not so sure about the second. Seems well possible that the Chinese, like most creditor nations, will continue diversifying their foreign holdings away from the USD. However, not only will they not want to do anything that risks permanently sinking the US consumer, they have a long-term target that requires them to build on the influence they already have over the viability of the US financial system: reabsorption of Taiwan.

2008 Sep 12 01:48 PM

[bowman711:]

OldLimey - point well taken. Actually, it would be in the best interests of both the U.S and China to carry out any mega-exit from dollars in an orderly manner.

2008 Sep 12 03:32 PM

[NOWHEREMAN:]

Agreed to all.

My take is that the Fed now has the leeway to lower the discount rate next week: Lower inflation, dollar strength, Lehman fallout, and Hurricane Ike. Whether its .25 or more is moot. They have the ability to disconnect from the futures market predictions inre interest rate forecasts. I think they will try to decouple themselves.

2008 Sep 13 06:57 AM

[richrdinbel...:]

The Dollar has been strengthening on a falling Euro, FXE, which is something that I discuss at length in the linked article Which Way For Gold And The US Dollar?

2008 Sep 13 04:25 PM

[directcommu...:]

With the new bonds offered to cover the fanny freddy mess, should trickle back down to help offset the dollar. This country is in a bad place right now. Expect the correction in the next 6 weeks to offset the dollar gains.

2008 Sep 27 03:03 AM