With the dollar hitting a yearly low and the Federal Funds interest rate near zero percent, I think many people should be concerned about when inflation will creep back into the economy. Looking at the following two charts from the St. Louis Fed, one can see why inflation has been held in check for the past year. The money multiplier has fallen below one and has not moved much since the beginning of this financial crisis. At the same time, the monetary base has exploded as the Fed has injected lots of new money into the banking system through their open market operations. I do not think that the Federal Reserve will be able to accurately time the winding down of the monetary base to ward off future inflation, because there has not been much precedence of this before. Inflation and high inflation have been in existence since fiat monetary systems have been created.

Since 2006, ProShares has offered Ultra ETFs that have exposure to twice the daily exposure to certain underlying indexes. These ETFs can either be long or short the daily index. These ETFs are able to track the daily inverse by using financial instruments that allow them to use leverage.

ProShares Ultra S&P 500 (SSO) assets comprise of:

While the basic materials equity index is up nearly 24% over the past month, iPath Dow Jones AIG Total Return Commodity Index ETN (DJP) is up only 8%. If you blinked and missed this historical run up in equities, you can still gain some exposure to a possible recovery in the global economy. Commodity prices reflect relationships between short-term supply and demand for goods. Commodity price increases will occur in greater effect once economic activity begins to pick up. Unlike commodities, investing in individual commodity producers requires an investor to be exposed to a great deal of unsystematic risk. Commodity producers have recently priced in much of the future prospects of economic growth, whereas commodities have not reflected these prospects to the same extent.

The Dow Jones AIG Total Return Index is composed of several components of returns. Through DJP you are exposed to price changes in the basket of commodities held by the index, the roll yield of managing the futures within the index, and the collateral yield of the index. The roll yield is the gain from methodically rolling futures in a backwardated market. Rolling occurs when a future contract is near expiration and the long must enter into a new future contract of the same commodity. The gain occurring from the roll happens during a backwardated market, because the future price is less than the current spot price when the long enters the contract. Assuming the spot price does not change drastically from the purchase of the future, the long can sell the future at the current spot price and roll into another long contract with a future price less than the current spot price. The roll yield is that gain from the difference between the future price and spot price.

Oil Gold Parity

All data is shown in monthly prices.  Correlations were made using historical monthly prices for the time period stated.