For those of you have been too locked in playing the new Call of Duty game and completely forgot what’s happened this year, lemme give you the lowdown on the commodities markets.
So what’s been the driving force behind the rise of commodities?
One factor has been the persistent rise in demand from China. No surprises here. As I’ve pointed out time and again, China’s economy is projected to post near double-digit growth well into 2011. With China and other emerging markets (think BRIC) looking to develop their economies, there is an increasing need for commodities.
Another reason why commodity prices have been soaring is due to the dollar’s weakness in 2010. With the dollar falling across the board, Treasury bond yields have become less attractive. In turn, investors have resorted to parking their funds in commodity-based assets in search of more profitable investments.
We all know that low interest rates and QE measures aren’t good for the dollar. As the dollar slides, this pushes commodity prices higher. Remember, commodity-based assets are normally priced in dollar-terms. As the value of a dollar falls, more dollars are needed to purchase the same amount of whatever commodity an investor is eyeing. This leads to a bubble-like effect, as commodity prices are pushed higher and higher.
Given strong demand from emerging economies and the Fed’s promise to inject more money into the economy, I suspect we will continue to see commodity prices rise. In fact, China’s oil needs are expected to drive oil prices to $110 in the next five years, which is almost 30% higher from its current price.
I don’t know about you, but the situation looks very scary to me. The persistent rise of commodity prices could lead to uncontrollable inflation all over the world, which would put pressure on wages. Say good bye to domestic demand folks!
But what does this mean for the currency market? Well, if the prices of gold, silver, crude oil, and other commodities are seen to continue climbing higher, then it only follows that commodity-based currencies would also rise.
But you have to find out for yourself which currencies I’m referring to because it’s a very well-kept secret here in BabyPips.com…