The Energy Report: How do you account for falling commodity prices?
Steve Palmer: The strong U.S. dollar is driving commodity prices down. The dollar-based slide is magnified by the summer doldrums and the lack of liquidity in many of the junior names. There is also a widespread perception that the Chinese growth rate is slowing, which is negatively impacting the value of commodity stocks in general.
But the reality is that, even though the growth rate in China has declined to 7%, it is growing from a much higher base, and this still translates into strong demand for commodities.
TER: Why does the strong dollar drive down commodity prices?
SP: Commodities are priced in U.S. dollars. As the U.S. dollar exchange rate goes up, commodities become more expensive for buyers and demand falls. There is an inverse correlation between the U.S. dollar and commodities, particularly gold, but also energy.
TER: If the U.S. dollar keeps getting stronger, and producers cannot afford to buy industrial commodities, then the supply of these commodities is going to increase, which will also drive prices lower. Between the strong dollar effect and its consequent supply/demand responses, it sounds like the perfect storm is brewing. If the Federal Reserve uncaps interest rates, will that help the energy and gold markets weather the storm and recover?
SP: Historically, the Fed has always waited until commodity prices are rising before increasing interest rates. It raises rates to cool a strengthening economy, so that prices do not inflate. We are longer away from interest rates rising than most people think, in my view.
“When the junior space is depressed, it is a good time to pick up shares.”
However, I do believe that the U.S. dollar is poised to weaken, which should have a positive impact on commodity prices. Accelerating global growth in 2016 will …read more