The dollar and commodity metal prices have gone through a rollercoaster ride these last few months. That ride started from a dollar low against the Euro of nearly 1.60 in early July, to a high of 1.40 in mid September and back to 1.47 now. The metals markets have been so totally focused on the movement of the dollar they have almost ignored large flows of metal into and out of stock. Talk of power shortages, hurricanes and rumors of capacity closures that would normally have caused significant swings have made little to no impact on pricing. The reality is demand for these metals ” aluminum, copper, lead, zinc, nickel and tin, etc have in large part been steady. The investor attention has been on the effect currency movements are having on consumers’ local prices around the world.
As the dollar weakens, consumers will pay a higher dollar price for their metals in the knowledge that the price in their local currency has not changed. So what effect is the brave Hank Paulson’s TARP “Troubled Asset Relief Program ” going to have on the metals markets, if any? I say brave because as he is acutely aware, history will judge if this will be viewed as a successful market support in the face of potentially a 30’s style depression or a colossal act of socialist style intervention at the alter of western capitalism. The fact remains it has and will continue to have an impact on the US dollar.
Opinions vary, some think it will undermine the US financial system, raise public debt and hence weaken the currency. As we have seen, that could lend support to metals prices and either halt the slide in metal prices or even cause a reversal in direction. We err more on the side of the usually thoughtful Financial Times which analyzed the similarities to a smaller undertaking the Japanese government undertook in 2002/3 called the IRJC. TARP represents some 5% of US GDP whereas IRJC was a smaller 2% of Japanese GDP at the time. There were also cyclical differences in the two countries economies at their adoption dates. However encouragingly the FT found that the Japanese Yen went on to strengthen from Y122 to the dollar from September 2002 to Y107 by the end of the following year. In addition, there was immense asset depreciation and poor growth between the early 1990’s when Japan’s banking crisis hit and their solution ten years later ” the conclusion being procrastination is more expensive than intervention. So although there will be currency volatility in the short term as a result of TARP, the probability is in the medium term it will contribute toward a return to banking and currency stability. This in turn will contribute to stability in metals prices ” at least as far as speculative plays are concerned.