What happens to commodity prices if the American dollar collapses?
It’s not such an idle question these days, with some gurus calling for a plunge in the U.S. dollar in response to the American government’s almost unbelievably large financial bailout spending recently.
People such as Jim Rogers and Marc Faber have been calling for a dollar collapse recently and they’re getting listened to these days. Rogers stirred the pot in the past week during a half hour Bloomberg TV interview in which he said he was certain that the massive spending and extension of credit by the U.S. government and the Fed would lead to an implosion of the dollar’s value. What about the recent rally in the U.S. buck? Just a temporary thing, Rogers said, caused by people who had sold short the dollar having to buy back their positions. Once that liquidation rally’s over, and the world realizes that the U.S. government is almost bankrupt and the U.S. economy is in a deep recession, the world’s investors will flee the dollar and cause its collapse.
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Faber has recently been saying that the massive government spending around the the world in the past two months may have saved a bunch of banks, but has pushed those governments much closer to bankruptcy, which would be a far worse result than banks going broke.
Commodities on the world market are priced in U.S. dollars. When the U.S. dollar goes up in value, Canadian farmers tend to see the commodity prices they receive go up, and when the Canadian dollar goes up in comparison to the greenback, commodity returns tend to fall. Recently the rising U.S. dollar has been a cushion for prairie farmers.
What happens if the U.S. dollar collapses as the world’s default currency? Will commodity traders switch to some other currency? Or go to a basket of currencies? Or move to barter?
Everyone’s waiting for a commodity market recovery these days, but prairie farmers want one that actually puts more money in their hands. If they simply see a rally in U.S. dollar terms, and the U.S. dollar plunges in value, the actual money coming in to the Western Canadian farm might not go up at all.
Sometimes, when people grow fearful of the value paper money, they throw their savings into hard assets, such as gold, other commodities and real estate. That can raise commodity prices and create the sort of commodity bull market that people like Rogers believe we’re still in the middle of.
But in a situation of a massive plunge in the U.S. dollar’s value, commodities may soar on the charts, but not move up in real, Western Canadian terms.
