Energy & Precious Metals – Weekly Review and Calendar Ahead By Investing.com – Investing.com

Energy & Precious Metals – Weekly Review and Calendar Ahead By Investing.com – Investing.com

© Reuters.

By Barani Krishnan

Investing.com -- Aren’t oil and gold both inflation-sensitive commodities? Then, why do prices of crude rally with barely any restraint now, while those of bullion fall almost indiscriminately?

Shouldn’t the pressure of rising U.S. wages and bottlenecks in global supply chains lift both concurrently, though maybe not equally.

Yes and no.

The inherent nature of commodities is that their prices go up when the dollar’s purchasing power comes down from higher costs. Note that in this cycle, the dollar is vulnerable in either situation. Commodities start the cycle from rallying to supply-demand pressures; the dollar then gets hit from rising inflation and commodities react to the inflationary cycle by going even higher.

The strongest case for commodity prices as a leading indicator of expected inflation is that commodities respond quickly to widespread economic shocks.

Systemic shocks — like this year’s Hurricane Ida, for instance — can decimate commodities supply (in this case, oil) and subsequently increase their costs. By the time the commodity reaches consumers, overall prices would have increased — Ida alone boosted U.S. crude prices by almost 10% — and inflation would be realized.

But history also shows that commodities with high