Gold’s move up against the US dollar has run out of a steam, at least as a trade. “Gold fell the most since August after the dollar rebounded from the lowest ever against the euro, reducing the appeal of the precious metal as an alternative investment,” reports Bloomberg.
It will be fascinating to watch the trading in commodities and currencies for the rest of the year. Commodities like oil and gold are at the high-end of their trading ranges. The dollar is at the low-end. The yen remains weak, the euro too strong for the liking of European governments.
When you see assets reaching extreme trading ranges, something has to give. Either they test previous highs and make new ones, or they fall back and re-organise for a fresh assault later. The decline of the dollar is forcing the issue and causing a re-think of the fundamentals of the global system. That’s a tough market to trade in. But if you like volatility, you’ve got to love the current conditions.
The Reserve Bank made no changes to interest rates, it revealed today. No surprise there. Perhaps the most interesting news coming from the Bank today was the release of its monthly index of commodity prices. The index was up a whopping 2.6% in September, which isn’t a surprise either when you look at the trend in commodity prices since the bottom of 1999.
The rise in commodity prices is coming off an awfully low base. What’s more, the cost of raw materials has been declining for roughly 200 years, with more and more producers entering the global economy.
Today, of course, more consumers have entered the global economy as well. Several billion of them. This has reversed the long-term decline in commodity prices. It’s also the best argument for the bull market in resources lasting another 10 years.
The biggest risk right now is that real economic activity is about to by compromised by real financial chicanery. We suspect you haven’t heard the last of the global credit crunch yet. In the meantime, we’ll enjoy the resource ride.
Markets and Money