Saturday, March 1, 2008

Commodity Express

In his testimony before Congress on economic conditions, Fed Chairman Ben Bernanke stated, "It is important to recognize that downside risks to growth remain." This was taken as a signal that the Fed will once again be lowering interest rates at the March FOMC meeting. This sent the dollar to new lows against the Euro and commodities prices soaring as gold futures approached $1,000 an ounce and oil futures rallied to $102.59 a barrel. Are we seeing the froth of another bubble, this time in commodities, as the speculators (who never quite seem to learn their lesson) seek to find yet another way to get rich quick?

Recently, economists and investors completely debunked the notion that the major economies of the world may have decoupled from the US economy. Yet the very idea that commodity prices will continue their dizzying upward spiral despite a slowdown in the US economy would almost indicate some denial going on here. Since a slowdown in the US would bring about lesser demand for foreign and domestic goods, which in turn will slow production in foreign countries, which will mean less money to purchase goods (which are made from commodities), it seems in the very near future the direction of oil and other commodities may be down.

Inventories of gasoline and heating oil have been higher than anticipated and winter is almost over. As gasoline hovers at $3.00 a gallon and threatens to go to $4.00 a gallon, can a slowdown in consumption be far behind. At this point, OPEC has not cut production, and why would they? At $100 a barrel their greed overwhelms their business sense, much as the builders, mortgage brokers and banks during the run up to the housing correction. It's no wonder consumer confidence fell in February to the lowest level in 17 years. All of this, and we are not even sure we are in a recession yet. Let's just hope the most recent homeowner bailouts being contemplated by Congress never get out of committee, or we could take a slowdown and create a disaster.

John Kaighn

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