Discussion in 'Economics' started by Alex the Great, Apr 24, 2008.
Why do lower interest rates result in higher commodity prices?
Think of interest rates as the price of currencies. So if the US lowers its interest rate dollars become cheaper for foreigners. Since any commodity you are likely to look at is priced in dollars a lower interest rates = lower dollar = higher commodity, everything else being equal.
Since 2000 US consumers have seen the price of oil go up ~250%, europeans have only seen oil go up ~90%.
And our central bank is supposed to care about price stability.
the system is being flooded with paper.
G. Britain just announced a $100 billion bailout fund.
print more dollars, hard asset prices go up.
something that completely baffels the CNBC on air staff
When the central bank lowers interest rates they are encouraging more borrowing, this is inflation. THe result of inflation is you have more money chasing the same amount of goods and naturally the price goes up. Inflation creates artificial demand.
Simple: they don't necessarily correlate. Rates were lower in 2001-2003 but commodities like crude were very cheap then. Rates were higher in 1995-1998 but commodities were cheap. Rates were very high in 1978-1982 but oil & gold were expensive.
Hence there's no correlation. Commodities are affected by a number of factors of which rates are just one.
There is a definitely a correlation, but you are right that there are many other factors that affect prices. 2001 - 2003 the fed was cutting rates because of fears of deflation, hence the lower commodity prices. 78-82 massive inflation so of course oil and gold were "expensive." 95-98, I don't have the best explanation but there were other assets classes that investors were paying more attention to then.
The upward commodity cycle began long before the Fed started to cut rates.
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