Fed Must Be Happy As Commodity Prices Continue to Tumble

Oil and gold continue their fall, providing even more breathing space for the Fed. Will it continue?

Commodity prices continued their decline this week, as Crude oil for September delivery dropped as much as $1.38, or 1.2 percent, to $113.63 in after-hours trading.  Gold also tumbled below $800 an ounce. 

What's to blame? 

Jon Nadler, a senior analyst at Kitco Minerals and Metals Inc of Montreal said: ``It's really a reshuffle of assets away from commodities, a sector rotation.  Investors see that the Fed is resolved to fight inflation by hiking rates."

Yeah, exceptt that it's unclear when and if the Fed will hike rates.  The dollar bounce has more to do with the weakening economies of Europe and the world than with expectations of future Fed rate hikes.  A strong dollar reduces the demand for gold as a hedge against inflation. 

The Wall Street Journal's headline article this evening says: World Economy Shows New Strain.  The Journal writes:

"On Thursday, the European Union's statistics agency said gross domestic product in the euro zone contracted 0.2% in the second quarter, the equivalent of a 0.8% annual rate of decline. It marked the first time since the early 1990s that GDP has fallen overall in the 15 countries that use the euro."

This explains oil's decline.  As the world economy is contracting, demand is falling.  Bloomberg writes:

"Gasoline demand was down 2.1 percent through July as record prices and slower economic growth cut consumer spending, an American Petroleum Institute report showed Aug. 13."

With economies across the globe cooling, this decrease in demand will spill over to the rest of the world. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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