Just two weeks ago newspapers were full of articles about the end of the commodities bull market. How foolish they look now.

I believe that commodity prices have further to run… and the bailout of Fannie and Freddie has confirmed this.

The US housing crisis has resulted in an unprecedented wave of wealth destruction across the world over the last 12 months. And it’s going to get much worse before it gets better. This is good for commodities.

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Commodity prices are boosted by a falling dollar.

The dollar is used to quote most commodity prices. A sliding dollar means producers outside the US get less cash for their product, be it copper, gold or oil. This means they have to raise prices to preserve their income.

So the bailout of Fannie Mae and Freddie Mac over the weekend by the US government is bad for the dollar, but good for commodity prices.

It means that the US government is getting itself into even more debt.

Indeed, as I write this the dollar has just hit a new all-time low against the euro… and there will be plenty more of this in the coming months.

This is bullish for commodity pricing

The weekend’s events mark the second bailout of a US financial institution in just four months. This has shifted the risk of dubious business models onto the US taxpayer and away from corporate America.

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This is not the way free markets should work. Indeed, commodity guru Jim Rogers was utterly scathing.

He told Bloomberg:

"I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae. These companies were going to go bankrupt if [the government] hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they’ve made. What’s going to happen… [will] you put some Band-Aids on it for another year or two or three? What’s going to happen three years from now when the situation’s much, much, much worse?"

So, the bailout of Freddie Mac, Fannie Mae and Bear Stearns make the dollar outlook even worse… but it makes the outlook for commodity pricing much better.

Of course, the dollar is not the only factor that is driving commodity prices. The rapid development of Asia and growing affluence around the world means that supply of these finite resources is very tight. There are more people in the world all wanting more “stuff.”

If the US taxpayer continues to support institutions that would otherwise be insolvent, the dollar will continue as a major driver of commodity prices in the coming months.

Commodity markets still look good. To discover what I believe are the current hottest plays on the commodities sector click here.

Regards,

Garry White
Editor
Smart Commodities UK

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