What Effect Will Inflation Have on Commodities?

by: Hard Assets Investor November 20, 2008 | about stocks: DBC    
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By Brad Zigler

Real-time Inflation Indicator (per annum): 7.9%

Well, the hits just keep on coming. And I do mean hits. As in body blows. The U.S. economy's scorecard is shaping up pretty poorly this round. Just this morning, the Bureau of Labor Statistics reported new jobless claims climbed well above expectations to a seasonally adjusted 542,000 last week. The previous week's revised level was 515,000. October's national unemployment rate was clocked at 6.5%

If that's not enough, the Conference Board's updates on its suite of economic indicators points to yet more trouble ahead.

The index of leading economic indicators fell 0.8% in October, a wobble much worse than the 0.5% drop expected on the Street. On an annualized basis, the index is declining at a 4.7% rate, a significant increase in downward velocity from the 2.3% annual decline last pegged by the Conference Board. Increases in unemployment claims were one of the factors contributing to the index's steep decline, along with declines in stock prices, building permits, supplier deliveries and consumer expectations (for a look at consumers' views, see "Consumers Buy Into Disinflation" here).

Real-Time Inflation Indicator

In a reversal of a five-month downtrend, the Conference Board's index of coincident indicators ticked up 0.2% in October, largely due to increased industrial production following a spate of September hurricanes.

Despite the upward blip, the coincident index, like the leading index, is deeply entrenched in a year-long downtrend. The trajectories suggest the economy is unlikely to see improvement soon, and that economic activity may contract even further.

Readers of Hard Assets Investor have been watching the disinflationary trend in our Real-time Inflation Indicator for some months now (see "Computing Inflation In Real-Time" here).

So, what does all this spell for commodities? To the extent that commodity prices and inflation are most often coincidental, it's still likely to be rocky in the near-term. As chronicled in our recent features on soft commodities (the latest is "Cocoa Analysis Completes Our Tropical Trifecta" here), futures on most physicals have been in liquidation since their July peaks.

The liquidation has also been reflected in commodity-tracking exchange-traded funds. The number of shares outstanding for the PowerShares DB Commodity Index Tracking Fund (AMEX: DBC), for example, cratered this fall and have only now begun to build a base. That base could, in fact, be a launch pad. At last look, DBC's float crossed to the upside of its 50-day moving average.

DBC's Outstanding Shares

It's bound to be an interesting holiday season ...

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