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Showing posts from June, 2008

Commodity Misconceptions

The price of oil has been the hottest topic in the news for the last 6 months. Today, the Saudis are meeting to discuss the unacceptable high price of oil and ways of controlling that price. To this, many supposed experts in commodity pricing have claimed that the US dollar is the cause for the high price.

The claim that a currency is the cause of a high commodity value is absurdly parochial. The US dollar is freely traded on the open money market. Therefore, if more people purchase dollars instead of their own currency, then the value of the dollar increases. When currency investors realize their gains, the relative value of a currency decreases, much like a stock. In effect, currency is the stock of a country, and commodities are traded by trading equity positions in countries.

The price of a commodity is controlled by contracts, not supply. You don't purchase hard commodities on the open exchange [3][4]. Rather, you purchase the rights to a contract of a specific amount of that c…