Weakening US dollar driving commodities higher

It is interesting to note that it is not only stocks that have been bought by investors, but also safe havens like gold and bonds. It could be thought that as stock markets recover, and investors become less risk averse, safe havens will be sold.

Nothing could be further from the truth. The December futures contract of gold for instance recently again hit an all time high of around $1,150 per troy ounce. Investors might seek a hedge against inflation in the (near) future.

Another important factor in the rise of commodity prices is the weakening US dollar. As the greenback loses value, commodities (and stocks) are getting cheaper for foreign investors. WTI and Brent oil are traded in dollars, which implies that oil producing countries are confronted with the decreasing value of their output.

In other words, a lower US dollar is good for buyers of commodities, but bad for producing (and exporting) countries, who might sell the US dollar to protect their value.

It is no wonder that media recently reported that some oil producing countries in the Gulf region are seeking to replace the US dollar with a basket of currencies when trading oil. This will protect the value of oil more than in the case when it is denominated in one currency.

The future will tell whether or not the US dollar loses its role as number one reserve currency. However, as long as the dollar erodes in value, the chances are getting higher and higher.