Transcripts

"The Economy and the Markets at Mid-Year"-Commodities Moved in the Right Direction

SUSIE GHARIB: Like stock prices, commodity prices also reversed direction in the first half of the year. As Jeff Yastine reports, traders started to worry that efforts to stimulate the economy might go a little too far.

JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: There's no argument that the economy was weak in the first half, as Americans cut back their spending. And yet for commodities traders, the first half of 2009 was one for the record books. Oil prices somehow rose more than 50 percent, even though the recession crimped energy demand. And amid a weak home construction market, copper prices posted a similar increase. So what gives? Well, Phil Flynn of Alaron Trading says it's all about that little piece of paper we carry in our wallets called the dollar. He notes that if the U.S. economy gets worse, the Fed can inject more dollars into the U.S. economy to restabilize it, but he says that action comes with one important side effect.

PHILIP FLYNN, ENERGY ANALYST, ALARON TRADING: If that happens, the value of our dollar get weaker and commodities that are priced in dollars get a lot more expensive. So if the economy gets worse, well, guess what, even though demand for commodities might be bad, the demand for the dollar is just going to be even worse and that's going to drive up the cost once again.

YASTINE: The price of gold provides another example, amid worries the Fed will succeed too well in reviving the economy. Doug Groh of Tocqueville Asset Management says jewelry sales, which consume a majority of the gold supply are way down.

DOUG GROH, SR. ANALYST, TOCQUEVILLE ASSET MGMT.: And yet gold is very strong. And what's taking up the demand that jewelry is not demanding is the investment demand for gold and I think it reflects that concern over inflation and the desire for (INAUDIBLE) value.

YASTINE: Alaron's Phil Flynn sees China as a factor in the rise of commodity prices this year. He says Chinese companies are stockpiling commodities, not just for future consumption, but also as a hedge -- a hard asset -- against a weaker dollar.

FLYNN: They're very, very concerned about the state of the U.S. economy. They are concerned about owning all of this debt that we've been selling them over the last 10 to 20 years and what the value of that debt is going to be when they finally get paid back.

YASTINE: Some market watchers like Flynn, think the commodity rally will continue, as traders use the commodities markets as the ultimate hedge against an uncertain U.S. economy. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.