The Dollar Holds The Key For Commodities



  • The big rally ends, for now.
  • Approaching bear market territory.
  • Europe, Japan and now the Saudis.
  • Fundamentals still favor the dollar, but central bank policy is irrational.
  • Volatility ahead.

The U.S. dollar is the reserve currency of the world because of the relative stability of the U.S. economy. That is why the dollar is the pricing mechanism for raw materials or commodities all over the world. There is an inverse relationship between the prices of commodities and the dollar. When the dollar appreciates, commodities tend to move lower. When the greenback declines, commodities tend to appreciate in value.

People all over the world consume commodities. While output occurs in locations where geology or climate allows for production, consumption is ubiquitous around the world. Each commodity has individual idiosyncratic characteristics and fundamentals. However, as an asset class, when the dollar moves higher, commodities become more expensive in other currencies. There are over 7.3 million people on planet Earth and fewer than 324 million, or less than 4.5%, live within U.S. borders. Over 95% of the world operates in currencies other than the dollar. A higher dollar results in higher commodity prices in other currencies. Basic economics teaches us that as prices increase demand decreases. When the dollar moves lower, the opposite occurs. While there are always other considerations, the future path of the dollar will likely have an important influence on the path of least resistance for commodity prices.

The big rally ends, for now

Currencies tend to be stable financial instruments. That is because the mission of central banks around the world is to provide stability via tools like interest rates or other monetary policy instruments.

Beginning in May 2014, a massive rally in the dollar occurred. The dollar index was trading at 78.93 in May 2014; by March 2015, it had rallied to 100.38 - an increase of over 27% in 10 months. The historical volatility of currencies tends to be much lower than in commodities. As the chart highlights, weekly historical volatility of the dollar

This article was written by

Andrew Hecht profile picture
Weekly commodities commentary and calls, from a Wall Street veteran
Andy Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is the #2 ranked author on Seeking Alpha in both the commodities and precious metals categories. He is also the author of the weekly Hecht Commodity Report on Marketplace - the most comprehensive, deep-dive commodities report available on Seeking Alpha.

Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.

Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.

Andy understands the market in a way many traders can’t imagine. He’s booked vessels, armored cars, and trains to transport and store a broad range of commodities. And he’s worked directly with The United Nations and the legendary trading group Phibro.

Today, Andy remains in close contact with sources around the world and his network of traders.

“I have a vast Rolodex of information in my head… so many bull and bear markets. When something happens, I don’t have to think. I just react. History does tend to repeat itself over and over.”

His friends and mentors include highly regarded energy and precious metals traders, supply line specialists and international shipping companies that give him vast insight into the market.

Andy’s writing and analysis are on many market-based websites including CQG. Andy lectures at colleges and Universities. He also contributes to Traders Magazine. He consults for companies involved in producing and consuming commodities. Andy’s first book How to Make Money with Commodities, published by McGraw-Hill was released in 2013 and has received excellent reviews. Andy held a Series 3 and Series 30 license from the National Futures Association and a collaborator and strategist with hedge funds. Andy is the commodity expert for the website and blogs on his own site He is a frequent contributor on Stock News-

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always holds a portion of his portfolio in precious metals. That percentage varies with market conditions.

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