The FED's Actions Have Already Hurt the Raw Materials Industry #2: Commodity Prices
I have covered in a previous blog post how the effects of the FED’s monetary policy actions have been to cause a depreciation in all non-dollar currencies. In this section, I will cover how this is already bleeding into cheaper commodity prices.
There are three reasons for commodity price declines as a result of the FED meeting that this post will explore. The first is currency appreciation affects. The second is inflation betting behavior. The third is lower commodity stores.
When the value of every non-US dollar currency in the world declines, it means cheaper imported commodities and less export demand for American-made commodities at an attractive US dollar price. As a result, the FED meeting is, by strengthening the dollar, reducing commodity prices in America.
The effect of different exchange rates is the most strong in commodities markets, as opposed to markets for other goods and services. This is because factors affecting exports and imports are more important in commodity markets than other markets. It’s a lot easier to export oil, steel or soybean oil than it is to export the service a restaurant provides it’s customer.
Some commodities, known as precious metals are often purchased by investors who are betting inflation will increase. The precious metals category includes gold and silver.
People often buy precious medals as a bet inflation will go up. When the FED made comments which raised interest rates, people may have expected less inflation in the future. This could have changed the inflation betting behavior. Hence, lower inflation expectations could account for price declines in this category.
When real interest costs increase it may make it more expensive to hold onto commodities (as opposed to holding onto money in a bank account). Hence some intermediary suppliers of commodities may hold onto smaller stockpiles of commodities, even at the risk of not being able to meet some orders. In effect lower stockpiles mean weaker demand.
We can see the effect of new exchange rates on some commodities markets by looking at the data from Business Insider. This data is charted below and shows declining commodity values.
It makes sense to separate out most commodities from the category designated by Business Insider as “precious medals.” Because they are declining in value the most for specific reasons.
I will show first: charts of non-precious-metals commodities and second: precious metals. I have included all commodities from Business Insider, for which I can extract data. In the first category, not all commodities show a strong price decrease after the meeting, however many do and none show a strong price increase.
The commodities that do show a strong price decline are precious metals, natural gas, heating oil, aluminium, lead, nickel, lean hog (pork), soybeans and soybean oil.
#1: Non-Precious-Metal Commodities
#2: Precious Metals