Commodity Prices Have Strengthened. Are There More Gains To Come?

After looking at the table below, it's easy to see price strength. The price of gold hit $1,400 per ounce in November, pulling it up nearly one-quarter this year after a like gain in 2009. Silver prices also have been strong. Their one-third increase during the last twelve months followed a two-thirds rise during the prior twelve. As usually happens, this type of strength is set against a jump in financial liquidity. Evidence of that jump is that during the last three years the Adjusted Monetary Base, tallied by the Federal Reserve Bank of St. Louis, has risen two and one-half times.

Overall, the sea of financial liquidity has been created against the backdrop of a U.S. economy struggling to grow with too much debt. Moreover, economic strength in China, Australia and India have pulled prices up. As a result, investors are worried about the ultimate inflationary consequences for the U.S. (Dare we say stagflation?). A near-term spark for inflationary concerns is evident in commodity prices which have jumped with the U.S. economic recovery. Despite lacking vigor, the recovery has returned the level of U.S. real economic activity to just below its pre-recession peak. In the industrial sector, though the level of output overall remains depressed versus its earlier high, the 9.6% gain since the recession's bottom has raised capacity utilization. This rebound has raised the FIBER index of industrial prices 60% since its December 2008 low. In the agricultural sector, prices have strengthened as well. The S&P Goldman Sachs Agricultural & Livestock Price Index is just 5% below its 2008 peak after falling by one-third during the recession.

For analysis of gold prices and cotton prices from Haver Analytics see the September 28th and September 21st write-ups by Louise Curley. Commodity price data can be found in Haver's DAILY, WEEKLY and CMDTY databases.