The Fed Gives a Boost to Commodity Bulls

 | Jan 26, 2012 | 11:00 AM EST  | Comments
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Commodity market prices were rallying across the board Thursday morning, in the wake of Wednesday's proclamation by the U.S. Federal Reserve's Federal Open Market Committee that the central bank's monetary policy will remain very accommodative for at least the next two years.

Gold has led the raw-commodity sector higher, posting sharp gains in the immediate aftermath of the FOMC statement at midday Wednesday. Then gold prices showed important follow-through strength on Thursday to post a fresh seven-week high of $1,730.50 an ounce, basis the nearby February Comex futures contract.

After the FOMC statement Wednesday, Nymex crude oil futures prices popped back above the key $100-a-barrel level. Last week, crude prices had dropped to a fresh four-week low of $97.40 in the March futures.

Other commodity futures markets, such as grains, international foods and fibers, were posting upside price moves Thursday morning.

The Fed's reassertion that it will keep U.S. interest rates very low, with the possibility of another quantitative easing move in the future, aided commodity markets on a few fronts. It suggests that investment assets that compete with the raw-commodity sector (U.S. Treasuries, corporate debt and even stocks) will likely continue to have limited annual returns for at least the next two years.

The Fed's latest stance hints that it will continue to grease the skids for improved economic growth, which means better demand for raw commodities. And since the U.S. is the world's economic leader, better growth in the U.S. likely means better economic growth (and better demand for raw commodities) in the other major economies of the world.

The FOMC statement Wednesday also put immediate downside price pressure on the U.S. dollar index, since the Fed will continue to print more dollars to keep the world financial system liquid. That's also commodity-market bullish. The dollar index is a basket of six major world currencies weighted against the greenback, and it tends to trade in an inverse relationship with the raw-commodity sector. The reason: Most major world commodities are priced in U.S. dollars. A declining U.S. dollar index suggests that commodities will become cheaper to purchase in non-U.S.-dollar terms.

Finally, recent very accommodative monetary policies by the major central banks of the world had already raised the specter of problematic price inflation occurring at some point down the road. Wednesday's FOMC statement reinforced the easy-money tenor of the world's central banks. Economic history shows that accommodative monetary policy augurs problematic price inflation. Overall price inflation is the archenemy of paper assets such as stocks and bonds, but it is music to the ears of bullish commodity market watchers, as it suggests appreciating commodity prices.

Heretofore beaten-down commodity markets are now looking even more like a value-buying opportunity for end-users and for speculators.

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