Except for gold, the deflationary pressures from monetary policy are beating up the commodity complex

Gold is rising, but the other commodities continue to fade
Gold is rising for its own reasons. These reasons are not commodity complex supportive.

As we predicted, investing in commodities over the past year has been a sad endeavor. Despite all the talk this year about rising commodities prices from weather related catastrophes, animal-borne diseases, and tariff battles, gold has been the best performer out of all the major commodities. Gold is up 27.2% over the past 52 weeks, which was much better than the second best performer, lean hogs.

Although I believe that global central bank policy will be able to force interest rates continually lower over time, many out there are scared at the prospect of what negative rates mean to the world’s economy and financial markets. This fear of the unknown is what is driving gold higher.

Looking at the chart, we can see that lean hogs are down big since the swine fever scare, which goes to show that the best time to sell away hog futures would have been the same time the Economic Collapse Blog was writing about catastrophe in the livestock sector. The rest of the news continues to be grim for those bullish on commodities.

According to the above chart data, here are the following one-year percentage price changes for the following commodities:

-Corn: +4.2%
-Soybeans: +2.3%
-Wheat: -12.1%
-Lean hogs: +20.5%
-Live cattle: -4.1%
-Gold: +27.1%
-Lumber: -20.1% (not shown)

It only gets worse for copper and energy

Look at these one-year returns:

-WTI Crude: -18.7%
-Nat Gas: -27.9%
-Copper: -5.5%

My thesis with respect to investing in the commodity complex is fairly straightforward at this point. For some time now, I have been pointing potential investors away from commodities, except gold, for the following reasons:

  1. The central banks are in control, because they are guiding all interest rates lower: despite all the sound and fury to the contrary, the central banks are in control of this process. Thus, the monetary system will continue to evolve under their guidance. The nation-states desperately need lower interest rates to finance their ballooning deficit spending. So, in order to keep this going, the central banks have been effectively coordinating all their monetary policy programmes to make this a certainty. I think they are doing an effective job.
  2. Deflationary drags grow: All this debt servicing, regardless of prevailing interest rates, will create deflationary pressures, which serve to offset the massive currency debasement. These pernicious monetary policies will continue to suck the life force out of economic growth.
  3. Lower rates lowers producer cost of capital: Producers, manufacturers, and miners will tend to oversupply the market when their costs of capital fall. These manufactured lower rates are deflationary, by definition.
  4. The dollar will remain firm: Since the USD is the reserve currency, it benefits the most from this current monetary policy regime. The central banks are encouraging consumers and investors to take on debt. As long as there are no repudiations, the higher the debt burden grows, the more the dollar is supported. The amount of global dollarized debt grows and that, by definition, creates demand for the dollar from those needing to service their dollar-based debts. In addition, the U.S. economy has been holding up better than the other developed nations.
  5. Gold is rising for its own reasons: Gold’s price increase has more to do with the uncertainty that these global monetary policies have created than from inflation worries. I am concerned, however, that gold is having a similar setup like in 2009-2011, when global investors doubted the ability of the central banks to execute on their QE programmes the first time around. We shall see if this time is different. Since I knew that the central banks needed to commence on another massive round of QE and stimulus, and that many would be worried of failure, I had been recommending gold.
  6. The manufactured global political friction only benefits gold:  This ostensible chaos provides the necessary cover for the central banks to ramp up QE and such. While it has been gold supportive, it has worked to weaken worldwide economic growth. This weakness only serves to undermine commodity prices.
What will it take for commodities to rise in price?

This answer is simple. If monetary policy loses its effectiveness and interest rates rise, I would be bullish on commodities. Any prolonged sharp spike in interest rates would work to restrict commodity supply, and would cause commodity prices to rise.

Any intimation that global monetary policy is failing would cause the dollar to fall. This happened last decade when the global financial markets almost collapsed. Furthermore, any prospect of debt repudiation or haircuts would result in the same outcome. The dollar is being supported, because it is clear as of now that all sovereign debt will remain in force. If this changes, capital costs will rise and the resulting loss of confidence in currencies could make everything rise on the consumer price side.