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Stop Talking About Commodities!

 

I sit here every day listening to the talking heads on CNBC, watching the headlines flash by on my screens, and seeing the newspaper finance editors talk about records and multi-year highs in gold, oil, wheat, soy…  There’s one thing that they really don’t talk enough about (although they do mention it as a side note from time to time): the U.S. dollar.  Anyone know what all these commodities are priced in?  I’ll tell you: The U.S. dollar.  Below is a plot of the DXY index, a basket averaging the strength of the USD against six major world currencies.

DXY Index

Looks pretty bleak…  Now take a look at the top plots in the two figures below, which are the DXY index compared to the price of gold and oil for the past five quarters (almost). 

DXY and Gold

DXY and Oil

The top sections of the above two plots is why I don’t understand the reason for so much media hype on the current dynamics of commodity prices.  DXY goes up, commodities go down, don’t need to be Einstein to figure that out.  I know, I know, the people on CNBC and the radio just read what they’re given, but what really should be getting attention is the USD.  Do they think that the oil barons and gold companies of the world are going to accept the same price for their commodities given that they’re priced in USD?  I don’t think so…  They’re going to price them so that the buying power of what is exchanged for their products, USD, maintains their state of wealth.  The USD weakness is what really should be getting hyped up; after all, this is the currency of the most powerful (by most standards) country in the world.  Economists have been harping on the overvaluation of the USD for many years, maybe we’re finally seeing their predictions be realized.

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