King Dollar and the end of the commodity supercycle – by Scott Barlow (Globe and Mail – December 8, 2015)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

The chart showing the history of commodity prices and the U.S. dollar looks simple and I suppose that, on the surface, it is.

But for investors looking to understand the recent swoon in commodity prices, and when the carnage might end, it’s necessary to look deeper at the hundreds of millions of investing decisions, and trillions upon trillions of dollars, that lie behind the relationship.

The often used statement “commodities are priced in U.S. dollars so the value of the greenback moves in the opposite direction of resources” is true but a gross oversimplification.

The real roots of commodity volatility were the crisis-era policies of the world’s two largest national central banks – the U.S. Federal Reserve and the People’s Bank of China.

During the financial crisis, Ben Bernanke slashed the interest rate benchmark from 5.25 per cent to 0.25 per cent. The strategy was to make credit so cheap that the major banks could repair their tattered balance sheets before they went bankrupt.

The other part of the plan was to incentivize large investors to sell U.S. Treasuries – because lower rates reduced coupon payments – and buy equities. This in turn was supposed to increase corporate capital investment and eventually employment.

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