Investors have heard over and over again that inflation is not a problem. As commodities, energies, and metals continue to march higher, your best approach is to "Believe What You See, Not What You Hear".
In 2001, just before the bull market in commodities began, Merrill Lynch decided to exit the business of trading commodities because of lack of interest from its clients. Shortly after this decision, the bull market in commodities began. So, when will be the time for investors to exit their commodity positions? Probably when Merrill begins re-opens its commodity trading business. Sound cynical?
Not if you listen to legendary investor Jim Rogers. In his book, Adventure Capitalist, Rogers said, "When Merrill goes back into the commodity business... sell out".
Until then, the commodity bull is taking its toll on inflation here, and around the world.
Demand from China & India
Commodity prices react to two things, inflation and deflation. If you believe that developing nations like China & India are going to slow their development, then inflation may cool. But, until then, don't hold your breath.
Other Causes of Commodity Inflation
1) A loose monetary policy by the Federal Reserve, which lead to the expansion of credit, which eventually created ramped speculation in real estate. This loose monetary policy and soaring budget deficits have lead to a decline in the dollar which also has an inflationary effect on our economy.
After the fed began its easy money policy, the fed funds rate fell to 1% creating a real estate boom which led to greater demand for building materials, which contain raw materials. To help slow the inflationary pressures in commodities, the Fed aimed its cross-hairs squarely on the real estate market.
As the economy slows, and potentially teeters with recession, commodity prices may cool for a while but will continue to march higher when a new economic recovery begins.
2) High energy prices increase inflationary pressures because some commodities are made with, or derived from, various energy products.
Commodities are in almost everything we use on a daily basis. Petroleum products are in ink, crayons, bubble gum, dishwashing liquids, deodorant, eyeglasses, records, tires, ammonia, and heart valves to name a few.
The companies making these products have a choice. One, pass on the increased costs to their consumers, or two, eat the cost and report lower earnings to their shareholders.
So, the bottom-line is, we have much higher inflation than what we are led to believe.
Comments (1)
Does this pertain to gold/copper as well? I thought that as a recession begins, investors will flee to gold as a 'safe haven'.
Posted by RC | April 4, 2006 11:15 AM
Posted on April 4, 2006 11:15