Only humorists of the old school, like Mark Twain, Will Rogers, or Russell Baker, could do proper justice to the current condition of commodities markets today. Analyzing the relationship of some, but not necessarily all, important commodities to the United States dollar requires an appropriate degree of caution, patience, and humor.

Since 2004, the general public has coped surprisingly well with significant changes and unexpected pressures in the U.S. economy, largely because expenditures on commodities and food make up a smaller share of the typical household budget than in previous years. The prices of petroleum and petroleum products generally have increased well beyond the limits of officially measured inflation. The same has been true of gold, silver, and other precious and industrial metals. The prices of most agricultural commodities, especially grains, eventually increased proportionately about as much as the non-agricultural commodities. Finally, since the trough of the last recession in the fall of 2001, the U.S. dollar (measured by the auction market-priced dollar index) has experienced an ongoing, general decline against major foreign currencies (like the euro) and precious metals.

 

Officially measured inflation has been surprisingly mild compared with the magnitudes of the commodity price changes and of the decline of the dollar since the fall of 2001. Clear thinking about these issues might suggest how a reasonably prudent investor should respond to the various commodity price shocks. Usually reliable guiding principles on this subject are that trees do not grow to the sky and that moderating forces tend to arise in free markets as price trends reach their extremes.