Commodities and the Global Economy

Many market observers have used commodities, both in general and individually, as indicators of overall economic conditions. Some have used commodity prices as a leading indicator of inflation, while others have used them as barometers of overall economic activity and health. In both cases this may not be wise, as the conventional wisdom of a relationship between commodity prices and overall economic conditions does not hold up to quantitative analysis and scrutiny.

Fortunately, sometimes the analysts get it right. For example, in late 1986 and 1987, gold was sending what could have been misinterpreted as a signal that the Federal Reserve Board should have been tightening monetary policy. Had it done so, such tightening could have combined with the stock market crash in October 1987 to push the U.S. economy into a recession. The Fed got it right, however, recognizing the rise in gold prices not as a sign of nascent inflation, but rather as a reflection of investors selling U.S. dollars and of political unrest in South Africa. By not tightening money supply in response to rising gold prices, the Fed helped avert a recession in the face of the sharp sell-off in equities in September and October 1987.

Gold is often used as a leading indicator of general price inflation. So, too, are general commodity price indexes. In reality, commodity prices, including gold prices, have never been good indicators of impending inflation in modern times. The joke ...

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