Commodity Prices Follow Gold — A Leading Indicator of Inflation
New York (Mar 6) Market analysts usually attribute changes in the prices of commodities - uniform, widely traded goods, such as metals - to higher or lower demand in major world economies, such as the United States and China. However, the price of a commodity also relates to the value of the currency in which prices are expressed, in most cases the U.S. dollar.
A fall in the value of a currency is easily recognized in the form of its depreciation relative to gold.1 Commodity prices followed the decline in gold prices starting in 2011, after following a long rise in gold prices beginning in 2001. In April 2013, the price of gold plunged another 15 percent, and economists expect commodity prices will follow gold with the same decline.
Global commodity prices also respond to economic growth in the short run, but these price changes are rarely sustained over time.2 Supply and demand and existing inventories do not explain the long-run behavior of commodity prices.Over the long term, commodity prices are part of a general movement in the prices of tangible assets - including commercial real estate, precious metals and collectibles. The prices of all of these are driven primarily by the changing value of the U.S. dollar. How do commodity prices relate to the long-run history of the U.S. dollar? What is the present commodity price outlook?
Industrial-Metals Prices Before World War I. We have longer historical price data for industrial metals than most other statistics. The U.S. Bureau of Mines (BOM) has published annual price averages since the 19th century. From mid-1946, Reuters Bridge Commodity Research Bureau (CRB) has compiled monthly spot-price data for about two dozen commodities. The CRB Index includes copper, lead and steel scrap, tin and zinc. (The base metals included in the calculations below include aluminum, copper, lead, nickel, steel scrap, tin and zinc.) From these data, we can see something of the long-term trend in commodity prices.
Source: NCPA.org
