Friday, July 10, 2009

What Commodity Prices Are Telling Us

Commodities have become a pretty good proxy for sentiment regarding the prospects for global economic recovery, as growth can be expected to generate increased demand for oil, industrial metals, and food stuffs. After breaking out of the base extending from December through April, commodities (DBC, above) have pulled back into that base, as investors have renewed questions regarding growth prospects. With that, inflation themes have taken a back seat to deflationary concerns, strengthening the U.S. dollar and sending Treasury prices higher (and yields lower).

For investors, nothing is more important than scoping out the prospects for inflation vs. deflation. The movements of the various asset classes are a kind of voting mechanism regarding those prospects and, thus far, are voting for continued economic weakness.