Stretching the Ruler

6 October 2003


Commodities are Stable; The Dollar's Falling

Those who ignored the popular buzz and went long the commodities markets a year or two ago are awash in profits. Platinum is at a 20-year high (car makers need it for catalytic converters), nickel costs far more than a nickel trading at a three-year high, and copper (which goes into everything) is at a two-and-a-half year high. Rising commodity prices usually means a coming economic boom, and inflationary risk -- not necessarily so this time.

Much of the increase in the prices of raw materials stems from the fact that their world prices are denominated in US dollars. Gold, for example, has its London morning and afternoon fix set in dollars. OPEC oil shipped from Saudi Arabia to Australia aboard a Liberian tanker is priced in the US unit. Cuban sugar, unavailable in America because of the stupidity of American diplomacy, is sold everywhere else in US cents per pound.

Last week, the Bank of Japan was actively intervening in the currency markets, buying dollars and selling yen. This has the effect of boosting the dollar by increasing the demand while increasing the supply of yen to bring its price down. The BoJ does this to manage the exchange rate and protect Japanese producers from the full effect of an ever-weakening dollar. In short, the dollar is so weak that it is hurting Japan.

To look at gold in dollar terms, the price has been on a tear, almost breaching the $400 per ounce level. Convert that price into euro, however, and the per ounce price rise is almost non-existent. After the liberation of Iraq, oil prices were supposed to drop, but they haven't returned to "normal," pre-war levels largely because the unit against which the price of petroleum is measured has shrunk.

While it is possible that the global economy is about to boom again, and there is evidence that some of the increases in commodity prices reflect greater economic activity, one would be more certain of the measurements currently being taken if the yardstick used weren't so flexible.

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