A lot of analysts are pinning the blame on decreased commodity prices on the strength of the dollar. On the surface, this makes sense. Usually, the price of oil and other commodities move in the opposite direction of the US dollar. A weak dollar means higher oil prices. A stronger dollar means a weaker oil and other commodity prices. A part of the dynamic is fueled by the fact that global money is always looking for a store of value. If the global sentiment focuses on the dollar as a store of value, this automatically means that gold, oil or commodities lose favor. On the other hand, if there is perceived trouble in the US economy and the dollar isn’t looked at as a safe haven, money flows to “real” stores of value like commodities such as copper, aluminum, steel, precious metals and others.
Dollar strength might be masking global economic weakness
The interesting thing about the current weakness of commodities is that it’s unusual. Usually, when commodities sink, they don’t all sink together. There’s always one or two commodity groups that manage to stay up or even appreciate while other commodity groups decline. This is not the case. Along with declining oil prices, grains, meat, copper and other commodities are also declining. You can’t just blame all this movement on a strong dollar. There’s something else going on. It doesn’t take much to figure that out. The reality is that the global economy with the exception of the United States is slowing down or headed towards a recession. In fact, certain economies are already in recession.
The strong dollar only acts as a mask for this global slowdown. Economic planners should pay attention to Chinese GDP figures as well as the ongoing drama in the Eurozone. All these factors point to a global economic slowdown and one key sign of that is a reduced demand for the building blocks of industrial production and consumption which takes the form, of course, of commodities. Don’t be fooled into thinking that it’s just the dollar’s strength that’s driving these commodities lower. A false sense of confidence drawn from the strength of the US dollar might lead you to make bad investment decisions. Declining commodity prices are simply the symptom of a larger process currently in play.