Commodities and Futures Markets to Watch

February 28, 2008

The Fed is Fueling the Rally in Commodities

I have been saying for quite some time that the Fed is all but pouring rocket fuel on the red-hot commodities markets. Here we are at the end of February and Bernake is testifying in front of the Senate. As Senator Shumer asks him if they will be able to control inflation if the Fed has miscalculated, he relies that they are watching inflation and it is unlikely to get out of control.

Well, the real story is that inflation is running high, as the recent CPI and PPI reports indicate. I would bet that the real numbers are actually much worse than the government is reporting as they often manipulate the data to serve their own needs.

Productivity and Inflation

Many experts might use the argument that inflation is not a problem, because increased productivity has kept a lid on the costs of other goods and services in the economy. That may be true, but I concentrate on the food and energy component, since I analyze and trade commodities for a living.

Productivity will do virtually nothing to keep the costs lower on food and energy throughout the next several years. You can only plant so many acres of soybeans and you are still at the mercy of the weather to have favorable yielding crops. The mining industry has done little to increase production for the near futures. Likewise, the oil industry will have little change in the exploration and refining areas to bring on beneficial supplies.

Actually, we have started robbing Peter to pay Paul by using soybeans and corn to produce ethanol in order to curtail gas prices. What has happened? We now have record gas prices and record soybean and corn prices! Bad weather this summer could make $15 soybeans and $5.50 corn look cheap.

Commodities Outlook

The long-term outlook for commodities is very favorable for prices moving higher for several years. The Fed has built the tidal wave with low interest rates and a disregard for inflation that will push commodity prices much higher. I think commodities will be the next bubble market in a few years.

Rising demand from Asia and other developing countries is likely going to tighten inventories of metal, oil and food commodities. The lower interest rate policy from the Fed has the Dollar on a one-way track - lower. A lower Dollar means commodities are relatively cheaper for foreign countries to buy and demand increases.

We are in a long-term bull market for commodities and playing the long side of the markets is the smart play. I think we can adopt the slogan of stockbrokers during the bull market in stocks during the 1990s - "Buy on the dips." There should be plenty of opportunities to buy in dips as commodities will be very volatile.

You can also view more of my updated comments on the commodities markets at Commodities.About.com.