Settling The Commodities Debate Once and For All (GLD, SLV, DBC, IAU, DBA, USO)
Is it just me, or does it seem like we’ve been here before? Oil prices are soaring into the triple digits, driving the cost of gas toward $4 a gallon and beyond.
Soybeans are skyrocketing. Wheat is surging. Corn is flying. Copper, aluminum, platinum, gold, and silver are going ballistic.
The dollar is plunging — against developed world currencies like the Swiss franc and Japanese yen and emerging market currencies like the Brazilian real and Russian ruble.
And the Federal Reserve? What’s it doing in response?
It’s explaining it all away! Washing its hands of responsibility! Pointing to useless, outdated inflation measures to avoid actually doing anything about the exploding cost of living.
If you have the same sense of déjà vu that I do, it’s because you have every reason to …
We’ve Been Here Before — and It’s Time to Explain Why We’re Here Again!
Back in 2007 and 2008, crude oil prices almost tripled from $50 to $147 a barrel. Gold rocketed from around $650 an ounce to $1,033. Copper surged from $2.39 to $4.27 a pound, while corn more than doubled from $3.08 to $7.76 a bushel.
Now I’ll be the first to admit that SOME of those gains stemmed from fundamental market forces. Tight supply. Rising demand. Weather conditions in certain producing regions. You get the picture.
But a huge, key culprit back then — as now — was the Fed, plain and simple. The Fed enabled rampant speculation by keeping interest rates incredibly low. It also essentially told Wall Street: “Go ahead and take the easy money we’re printing and buy all these commodities!” by saying that food and energy inflation would be ignored.
In fact, former Fed governor Frederic Mishkin in October 2007, said,
“Focusing on core inflation can help prevent a central bank from responding too strongly to transitory movements in inflation.”
And here’s what former Fed governor Randall Kroszner had to say in November 2007,
“Sizable increases in energy and food prices have contributed to a pickup in headline inflation this year, but the developments on core inflation (which excludes prices for food and energy items) have been moving in a more favorable direction.”
So what is the Fed doing now? Did it learn from that painful lesson, when surging prices first drove inflation through the roof, then helped contribute to the nastiest recession in decades?
Nope! It’s trotting out the same tired arguments, and making the same policy mistakes again!
I already told you what Atlanta Fed President Dennis Lockhart said in February, and what Ben Bernanke has said before Congress.
But the hits just keep on coming …
Chicago Fed President Charles Evans claimed in a CNBC interview this week that the Fed has nothing to do with the current surge in commodity prices. He added that,
“I think in terms of inflation it’s a change in relative prices that should not end up in inflation, not underlying inflationary pressures.”
Translation: It’s not our problem!
Then there’s MIT professor and economist Peter Diamond, an Obama administration nominee for the Fed who’s currently going through the confirmation process. He has made clear he’d pursue more of the same tired policies.
Commenting on inflation in a recent Congressional hearing, he said,
“The issue is, going forward, are there signs that inflation might be picking up quickly? … I view commodity prices as driven by micro factors, not general stimulation of the economy.”
Easy Money Flood Still Coming on Strong! What to Do …
Bottom line? While the rest of the world is raising rates to combat inflation, our Fed is dragging its feet. It’s keeping the liquidity spigots open, once again helping enable speculators with all the easy money they need.
That means you can expect gold and silver prices to continue rising. You can expect the dollar to generally fall against fundamentally strong currencies. You can expect interest rates to climb.
And even if some of the “Libya premium” comes out of oil in the short term — should domestic rebels, NATO, or the Arab League figure out a way to send Muammar el-Qaddafi packing — you can expect energy prices to keep climbing.
- Keep riding the Fed’s easy money wave as long as it lasts,
- Buy select resource stocks and investments,
- Hedge against rising interest rates using inverse bond ETFs,
- Don’t listen to the ridiculous pabulum being spewed by Fed officials. Rising commodities prices are inflationary, and they are most definitely the Fed’s fault, no ifs, ands or buts about it!
- And consider giving my Safe Money Report a try. Indispensable help in these treacherous times at 26 cents a day with a rock solid guarantee, you got nothing to lose! Click here to read my latest report.
Some Related ETFs: SPDR Gold Shares ETF (NYSE:GLD), iShares Silver Trust (NYSE:SLV), PowerShares DB Commodity Index Tracking (NYSE:DBC), iShares Gold Trust (NYSE:IAU), PowerShares DB Agriculture (NYSE:DBA), United States Oil (USO).
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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