HH Gold, Commodities, And The Inflationary Bogeyman

Unfortunately, when viewed in a different light, this chart reveals a concern about the purchasing power of the US dollar. If commodity prices are zooming higher against a relatively stable dollar, it implies that more dollars are required to purchase a similar amount of commodities. That, dear readers, is the very definition of inflation. As noted above, I think that some, if not most, of the recent commodity price inflation is demand-driven. A succession of fiscal stimuli and an expanding Federal Reserve balance sheet play huge roles in spurring that demand. That, as a software developer would say, is a feature, not a bug. In other words, these are logical and intended effects of governmental and monetary policies. 

We may learn more about whether the Fed is concerned about inflationary kindling when the FOMC minutes are released later today. So far, at least publicly, any concerns have been muted – if not dismissed outright. In the meantime, it is worth exploring the extent to which currencies of commodity-producing countries are acting as an inflationary hedge in their own right. That brings us back to the Australian (AUD) and Canadian (CAD) dollars. Both come from countries that are physically large, with low population density, and blessed with enormous natural resources. As a result, international investors have often used those currencies as proxies for commodity prices. We can see from the blue and red lines in the chart above that the AUD and CAD have been steadily rising over the past few months. For most of that period, they have generally kept up well with the rise in CRB. The problem is that over the past 6 weeks or so, CRB took a sharp leg higher while AUD and CAD did not. They failed to hedge the most recent leg of the rally in commodities prices as they had done before. 

I believe that some of the failure for CAD and AUD to keep pace to with CRB is the effect of the most recent $1.9 trillion US stimulus package. The US stimulus can certainly benefit the economies of key trading counterparts, but the effect is of course likely to benefit the US economy most. Hence, the relative underperformance of those two currencies vis-à-vis the commodity price spike spurred the stimulus package.

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