Commodity Trends: 2010 Year End Review

01/03/2011 Share 0 comments

Commodities, along with major risk assets such as U.S. stocks, emerging market stocks and REITs, have gone on a rage since Fed's QE2 announcement. Two major themes stood out in 2010:

1. The Fed's QE2 action ($600 billion treasury purchase) flooded the market with money, the unintended (or implicitly intended?) result is that investors fled away from fixed income market, revived animal spirit for risk and  drove U.S. dollars down, especially against the currencies of commodity exported countries such as Canada and Australia. This so called currency over-shoot caused commodities' prices go up and stoke inflation for emerging markets like China. As a result, precious metals such as Gold (GLD) and silvers (SLV) acted as the hard currencies of choice while the prices of agriculture commodities (DBA) went up in anticipation of upcoming inflation (on agriculture commodities, Jim Rogers and others have argued there is a secular fundamental trend also since the demand for food worldwide has been going up due to the better quality life in the developing countries). 

2. With the QE2 and the year end tax deal between Republican and Obama administration, investors were encouraged to see the end of tunnels for the economy. Recent positive unemployment and ISM numbers added hope that U.S. economy growth will accelerate (both PIMCO and Goldman Sachs have upped  their 2011 GDP growth to 3%-3.5%). As a result, industrial metals (DBB) and silvers (SLV), both sensitive to industrial activities, shot up. 

The above two themes are related but not necessarily the same. Going forward, they will continue to drive commodities' prices until they are proved otherwise. We are tracking the commodity trends weekly (details can be found here)

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