Commodity prices have been moving higher and higher for some time now. This is fueling price inflation across the globe. Gold has risen to such a high that even Mr. T of the "A" Team is considering selling all his gold necklaces.
You will hear many reasons quoted for this rise including:
- Supply – as the world exits from recession, commodities will appreciate in price.
- Demand – if China keeps expanding they will consume the entire world's supply of commodities by a date that's not too far away.
- Risk – the world is in such a bad state your money is only safe in Gold at $1,500 an ounce.
- Speculation – commodities can only go up.
What we have actually seen is the U.S. Dollar often times moving in an inverse manner to that of commodities.
The View from Europe
Imagine living in Euro land last summer when one Euro bought you $1.20 when oil cost $80 a barrel. You would therefore pay 66.67 Euros (80/1.20). Fast forward to last week when oil averaged around $110 a barrel and one Euro bought you $1.47. That meant that oil now costs 74.83 Euros (110/1.47).
For American residents, oil has jumped 37.5% from last summer, a rise which dramatically changes many business models and figures on everyone‟s “Inflation radar”.
For those earning and spending Euros (including many of our own multinationals), oil went from 66.67 Euros to 74.83 Euros, a rise of 12%. Not an insignificant jump, but approximately one-third of the increase experienced in the U.S. If you are spending Australian Dollars, you may have seen oil go down in price!
On a Euro weighted scale, Oil has risen 12%. This is certainly not a speculative bubble; it is a more realistic reflection of the prevailing Global Demand economics associated with the continued growth of Global GDP.
Sure, Oil is not cheap as it once was in America, but remember, this is a “weak currency” issue which isn't a big factor for those with a strong currency. Anyone who travels overseas will probably tell you how expensive everything is – “these days”.
