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Go to stockcharts.com and run a chart of $GOLD:$WTIC, or go look at the chart here: http://www.321energy.com/editorials/mckenziebrown/mckenziebrown031108.html .

If you have access to charts comparing prices of various grains to oil, that would be useful to look at too. Or, you can run a chart of DBA:$WTIC.

What you will see is that the gold:oil ratio has been declining since oil production plateaued in spring of 2004–in other words, oil prices have been rising faster than gold prices. Oil prices have also been rising faster than ag prices.

The trend is clear despite a year of flat oil prices that began in August of 2006, and was caused by the Goldman Sachs reweighting of the GSCI. That forced disinvestment in gasoline longs, and was a brilliant short-term way to rig gasoline and oil prices before the 2006 elections. We’re still not back to the same level of specs in gasoline, although we’re getting closer.

The trend will be even clearer in another year or two.

So, it’s not correct that lower interest rates have raised commodity prices at the same rate, as you would expect to see if lower interest rates were the driver of rising commodity prices.

I could write a 30-page post on this subject, but obviously there’s not enough space here for it.

The belief in a commodity “bubble” due to Fed policy has become the conventional wisdom. That’s a shame, because it will keep people from smart hedges for their futures.

Yves, you don’t have to trade commodities to hedge–buy some shares in something stable, like a good royalty trust. (Be sure to read the annual reports of any trust you’re considering, and choose something with a low production decline rate–like 3%). Your share price and dividends go up with the price of oil and/or natural gas, and you don’t have the headaches of trading.

Or try options on oil futures: http://www.energyinvestmentstrategies.com/2007/12/04/eis-newsletter-8-december-2007/

Moe Gamble

But lets look at this another way:

What is causing the stellar growth in China? Massive money growth.

What is causing massive money growth in China? The Dollar peg.

Why the Dollar peg? Because private investors don’t want to own Dollars when real rates are negative.

So its the same thing.

What I do believe is controversial is what the true “real interest rate” might be.

John Williams over at Shadowstats.com makes the argument that, if the federal government had not changed the methodology by which the CPI is calculated, inflation would now be running at 12%, instead of the 4% the that is being reported.

I think there is also the speculation that there is no limit what the current administration will do to bail out investment banks that have engaged in highly speculative and highly leveraged investment activities, even if the consequence is inflation.

So there is not only belief that inflation is much greater than what the government is trying to make the American people believe, but the fed is actively courting even more inflation in the future.

We have had deleveraging everywhere. But the last leverage game in town is commodities, since they are exchange traded. So a speculator (say retail or hedge funds with very broad mandates) could use little to no bank borrowings and still be highly geared just by putting down not much more than the contract minimum margin. And you get the interest on your T-bills too.

BTW, historically, 70% of the retail customers who trade futures win up losing money. I include myself in that statistic, a lesson learned many years ago.