Is there any relationship between the two? This may have been addressed in another thread, but I figured it deserves is own.
Well, when I was reading CRB commodity year book about 8 month ago this is what they put in there...of course I am using my words. As commodities are trading in USD, they are influenced by the price. If, the dollar declines....same as it happened throughout last 2+ years the price of commodity rises. Take this for example, the commodity cost 6 pounds of gold for one barrel of oil. Assuming that the price and the price of gold ALWAYS stays the same. The price of the dollar depreciates. So, then the price of a commodity will go up. THE point is, when dollar depreciates then the commodity price climbs up. Of course assuming that the commodity is priced in USD.
The dollar is 100% worthless paper backed by the fact that the world's oil must be purchased in dollars. Without the oil backing, the true value of the dollar would become apparent - $0. Facts: - Before 1971, world trade was transacted in dollars but settled in gold - We were printing more dollars than we had gold and the world was beginning to notice the depreciation and demanding settlement in gold - So in 1971, Nixon closed the "gold window" and dollars became backed by nothing more than faith - To shore up that faith, we made a deal with the Saudis to ensure they sold their oil ONLY in dollars This is why the US can print money with abandon while the rest of the world accepts the depreciating currency.
Actually I donât think it matters for the negative correlation to be true that oil is prized in dollars. Oil cost what oil cost on global markets. The fact that any country does something that may or may not be good for their currency should not affect oil as much as it affects its currency. If the US economy was smaller than it is I would think the negative correlation would be even bigger, US growth points to higher rates, higher rates points to stronger dollar, stronger dollar and growth points to higher oil prizes. The fact that US is a big oilconsuming economy reduces the negative correlation I think.
As most oil sold is paid for in dollars, higher oil prices creates a greater demand for $. THe upside to this greater dollar cirulation has been an infusion of that cash into our equity markets. A nice parallel. But will the inverse hold such a corrolation?