Tuesday, July 24, 2012

Commodity Prices and QE3

Debate is raging over whether another round of quantitative easing will in fact help boost the price of commodities.

Bears look at it from the point of view of demand alone, while bulls look at it from a more holistic view.

While demand is obviously a major factor in commodity prices, the U.S. dollar is just as important, and also can determine the demand because commodities are bought with U.S. dollars being used as the medium of exchange.

So if the U.S. dollar is strong, the demand for commodities can go down because of the high cost of acquiring them. That is what has been happening as it has strengthened against a number of currencies as the sovereign debt crisis in Europe continues to push down the price of competitive currencies.

If the Federal Reserve eases, that is sure to put downward pressure on the dollar and commodity prices in general will start to rise again.

There are other factors involved, but the strength of the U.S. dollar is among the top elements that impact most commodities.

Gold and silver will especially respond strongly if there is more easing, as they are also considered alternative currencies or safety against inflation, along with many industrial uses in regard to silver.

Over the short term it's any one's guess as to the price movement of commodities, but over the long haul there is no doubt commodities will, for the most part, continue on their upward price run.

Some commodities, for example grains, are already outside the impact of whether or not more easing will come, as other factors like the ongoing drought in America, and now parts of Europe and Australia, are aiding in pushing grain prices like corn and soybeans to record highs.

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