If Inflation Is Imminent, Why Aren't Commodities Soaring?

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Includes: UDN, UUP
by: Graham Summers

With the whole world clamoring that inflation (or hyper-inflation) is just around the corner, I thought we should actually look at what the market is telling us. If inflation is about to come roaring back, destroying the US Dollar and sending us into a Zimbabwean nightmare, then we should already be seeing signs of this showing up in the commodities markets: the famous inflation hedges.

The problem is… we’re not. Gold has erupted higher, prompting various pundits to proclaim that we’ll soon see prices of $2,000 or even $5,000. If this indeed going to happen, we need to see a consolidation or some kind of cooling as Gold has already gone somewhat parabolic, similar to the move that occurred in 2007:

If Gold is indeed soaring on fears of future inflation, we should be seeing other commodities moving higher. After all, commodities in general are viewed as an inflation hedge. And many of them suffer from supply shortages far in excess of the ones faced by Gold. On top of this, many industrial commodities have numerous uses aside from being inflation hedges… and since the world economy is allegedly back on track (it’s not) we should be seeing them spike as well.

First up, the industrial metals: We’ve certainly had a heck of a rally since Mach 2009… but we’re still a full 44% off the 2007 highs. If a nightmarish bout of inflation was indeed just around the corner, shouldn’t we see the industrial metals forecasting it? Instead, they’re struggling to close the gap back up to 400. And from the looks of the chart, we’re about to run into serious upward resistance at that level.

Next up, energy:We now know that the 2007-2008 spike was largely the result of speculation on the part of Goldman Sachs (NYSE:GS) and others: during that period real demand was falling and supplies increasing. However, even if we ignore that spike, we still find energy prices have been trading sideways for three to four years. In addition, they, like industrial metals are bumping up against a multi-year line of resistance.

Next up, agricultural commodities: Agricultural commodities have not rallied nearly as strongly as their industrial or energy counterparts in 2009. Despite this, the story here remains much the same: a massive spike for 2007-2008 followed by a rally that has brought the agricultural commodities up against a multi-year line of resistance.

If a nightmarish bout of inflation is indeed just around the corner, commodities sure aren’t predicting it: we’d be seeing more than gold breaking to new highs if they were.

What about the Dollar? The common perception of inflation is that it is the result of currency debasement.

To be sure, this is some serious debasement: the Dollar has lost 16% of its value since March 2009 when the Fed announced its quantitative easing program. And since May we’ve seen the Dollar trading in a falling wedge pattern. However, a longer-term chart reveals that the Dollar remains nearly 4% above its 2008 lows: when commodities across the board spiked to highs.

In simple terms, looking at all of the above data, I don’t see signs of rampant inflation, let alone hyperinflation coming in the near future. Instead I see some commodities soaring on speculation (gold and oil) while all others lag behind.

I’m also seeing that for all the “Dollar is about to die” talk, the Dollar refuses to break below 74, which is still 4% above the 2008 lows. With foreign central banks stepping in to devalue their currencies as well (Switzerland being a recent example), I can’t help but wonder if the Dollar might strengthen not because of our Federal Reserve’s policies, but as a result of other countries pushing their currencies lower against the Dollar.