FALLING DOLLAR IS BOOSTING COMMODITY PRICES -- MOST COMMODITY GROUPS ARE RISING -- COPPER HITS SEVEN YEAR HIGH -- WHILE GOLD RETREATS

FALLING DOLLAR BOOSTS COMMODITY PRICES...One of the side-effects of a falling dollar is usually rising commodity prices.   That's partly because global commodities are priced in dollars.    And our first chart reflects their inverse relationship.    Chart 1 shows the Invesco DB Commodity Index (DBC) in a rising trend since the spring and having risen to the highest level since the first quarter.    The falling green line shows the  Invesco Dollar Index (UUP) falling throughout that period.   The dollar has fallen to the lowest level in more than two years.   Three of the commodity groups that have gained ground include agricultural prices, base metals, and energy.   Precious metals have lagged behind the recent commodity rally.  Within the metals world, two of the best examples of that commodity discrepancy is the difference between copper and gold over the past few months.  Copper has been rising while gold has been losing ground.

COPPER HITS SEVEN-YEAR HIGH... Copper has been one of the world's strongest commodities.   The red bars in Chart 2 show the price of copper rising to the highest level in seven years.  Stocks tied to copper have followed the red metal higher.   A lot of that buying is coming from China which is the world's biggest buyer of that commodity.  Since copper is also considered to be a barometer of the global economy, this year's rise could be taken as a vote of confidence in the global economy and stocks.   Gold peaked in early August and has been in decline since then.   The inability of gold to rally in the face of a falling dollar is surprising.   Gold, however, is normally viewed as a haven asset which is normally bought when investors are nervous about stocks.   The recent rally in global stocks may be detracting from gold's safe haven role.   The uptick in bond yields may also be hurting gold's performance since it's a non-yielding asset.  Gold would need to rise above its November high to reverse its current downtrend.

RISING COMMODITY PRICES MAY BE BOOSTING BOND YIELDS... Rising commodity prices are often viewed as an early sign of rising inflation.   And rising inflation usually has the effect of pulling bond yields higher.   Which suggests that rising commodity prices may have something to do with the recent rise in bond yields.   Chart 3 compares the Reuters/Jefferies CRB Index of nineteen commodity prices (brown bars) to the 10-Year Treasury yield (green bars) since the spring.  And it shows both of them rising with commodity prices in the lead.  A lot has been written recently about a reflation trade which favors stocks tied to rising commodity prices and a stronger economy.   That includes stocks tied to energy and materials which have recently become market leaders.   Chart 3 suggests that the inflationary impact of rising commodity prices may be one of the factors pulling bond yields higher.