Are Tanking Commodities A Sign That The Federal Reserve Will Delay Rate Hikes?

A big topic of discussion in the finance and investing space is the Federal Reserve. During the depths of the financial recession of 2008 and 2009, the Federal Reserve reduced interest rates to an all-time low of 0.25%. However, we knew that the low rates wouldn't last forever; and all of this year, experts have been talking about when the Federal Reserve is likely to start rate hikes. However, there's a major cloud hanging over financial markets at the moment. Intricate factors of the financial market are starting to collapse; a fact that's most evident when we look into the commodities market. The reality is that no matter if you are talking about oil, gold, silver, or natural gas, chances are that you're talking declines! Today, we'll chat about why the commodities market is declining and whether or not this is a sign that the Federal Reserve will be forced to delay interest rate hikes.

A Strong United States Dollar Weighs Heavy On Gold

The strong United States dollar wasn't expected to last this long; and the fact that it has is is becoming a major issue for the commodities market. The reality is that most commodities are priced in United States dollars. From oil to gold, silver and even cotton, this proves to be the case. While there are a few different opinions as to why a strong dollar harms the commodities market, there's one that will make sense to just about anyone; it's the law of supply and demand.

The law of supply and demand tells us that when supply is high and demand is low, the value of the asset must decline to equal out the levels of supply and demand. The reality is that because commodities are priced by the United States dollar, when the dollar climbs, these commodities become more expensive in other nations. Because commodities are more expensive, demand for these commodities does down; ultimately leading to a supply glut. As a result, we see dramatic declines in the value of commodities; much like we're seeing today.

Worldwide Financial Concerns Also Wreak Havoc On Commodities

Another major factor that determines price movements in the commodities market is the state of the worldwide economy. Unfortunately however, the worldwide economy isn't doing so well either. While concerns over the Greek debt crisis are starting to fade, it's clear that Greece still isn't out of the woods. Not to mention, Greece is just one of 24 economies around the world that are teetering on the edge of bankruptcy. These countries include Armenia, Belize, Costa Rica, Croatia, Cyprus, Dominican Republic, El Salvador, and 16 others.

Going back to the laws of supply and demand, this is also a major hit to the commodities market. As mentioned above, commodities are priced in US dollars; and that metric is strengthening. However, the affects of the strong United States dollar become far more apparent when we see values of economies around the world weakening as the result of economic troubles. Not only are commodities more expensive outside of the United States, falling currencies around the world are are making them even more unattainable; ultimately causing the demand issue to widen.

The Iranian Nuclear Deal Will Likely Create A Bigger Supply Glut

The fact that the United States and Iran have come to a deal with regard to nuclear abilities is quickly becoming old news. We all know the deal was made and we all know it's likely to have a major affect on the value of oil. After all, Iran has the fourth largest oil reserves in the world; which is likely to lead to half a million barrels of oil per day being added to the market by the end of the year. However, it's also important to note that oil isn't the only economy Iran is rich in. The country is also very rich in natural gas. As a matter of fact, Iran currently accounts for 18% of the world's natural gas reserves; meaning that it has the potential to create a supply glut in that area as well.

Wage Growth Also Plays A Major Role

Another major issue that threatens the commodities market is wage growth. If you've paid attention to jobs reports in the United States recently, things have looked relatively good; at least at a glance. However, when we actually dig into the numbers, a daunting fact becomes very clear. While the United States is adding new jobs at a relatively decent pace, we simply aren't seeing the wage growth that should accompany jobs growth.

As a result of low wage growth, people are buying less homes, cars, jewelry and more. Every one of these purchases plays into the value of commodities. Ultimately, low wage growth is a major cause for concern as it causes declines in demand on the commodities market.

So What Does This Have To Do With The Federal Reserve?

The reality is that the Federal Reserve is going to have to make its decision to, or not to, raise interest rates based on the health of the US and worldwide economy. As you can see, every factor that has an affect on the value of the commodities market is an economic factor; ultimately making the commodities market a great gauge for the health of the United States economy. When the value of commodities are up, we can imagine that the United States economy is doing relatively well. However, that's not the case at the moment. This raises a big red flag for the economic state of the US. Ultimately, falling commodity prices mean that the US economy is struggling. With that said, this could be an indication that the Federal Reserve may not have the opportunity to raise interest rates this year. Only time will tell, but looking at a leading economic indicator (the commodities market) I don't think that the United States is in good enough shape to support higher interest rates.