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Monday, June 02, 2008

Currency-led commodities bubble

Benn Steil, Director of International Economics at Council of Foreign Relations, thinks the commodities bubble was caused by sharp fall of US dollar and investors' inflation concern. The commodities bubble is essentially a "currency bubble", so he called.


Expressed in gold, prices of oil and wheat haven't changed much.







And the correlations between commodities and US dollar increased to over -0.9 recently.






I am sympathetic to Steil's view and I see some parallel between the housing bubble and current commodities bubble.


In 2001, when economy was in recession and Greenspan Co. cut rates 11 times to 1%. Investors, lack of investment opportunities after dot.com bubble, all flocked to housing sector. Actually, housing was probably the only bright spot then.


In current cycle, Bernanke co. cut rates in a similar fashion, prolonging dollar's downturn, and investors again poured their money into the "safe haven" as a hedge both against inflation/US dollar and meager investment opportunities in a time of credit crunch, and twin crisis in both housing and financials.