View from the Observation Deck

1. Two of the major influences on commodity prices, aside from demand, are the value of the U.S. dollar and inflation. Weakness in the dollar can help push commodity prices higher. Since they are mostly traded in dollars, weakness in the dollar can cause prices to move higher to help compensate.
2. The dollar has been weakening since the latter part of July 2012 (U.S. Dollar Index is down about 6%) as fears over the sovereign debt crisis in Europe have eased somewhat. It was down 0.3% y-t-d thru September.
3. Aside from taking the federal funds rate to nearly zero, the Fed has expanded its balance sheet by approximately $2.0 trillion since 2008. That amount of stimulus is unprecedented.
4. Should all of the capital from the Federal Reserve's three quantitative easing initiatives get put to work it could eventually accomplish its goal of accelerating job growth and consumption.
5. That amount of stimulus, if effective, could push inflation higher. Inflation, as measured by the consumer price index (CPI), occurs when too many dollars chase too few goods.
6. When the prices of goods and services rise, the prices of raw materials and agricultural products should follow, if not lead.
7. With respect to the influence of demand, that is partially reflected in the price returns for 2011 (see chart). The tempering of growth in China plus the economic weakness in Europe helped dampen demand for commodities.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The following are unmanaged indices: Consumer Price Index represents changes in prices of all goods and services purchased for consumption by urban households. U.S. Dollar Index is an average of exchange rates between the USD and major world currencies. Thomson/Reuters CRB Commodity Index is an average of commodity futures prices with monthly rebalancing. S&P GSCI Agriculture Index is designed as a benchmark for commodity market performance over time. S&P 500 Materials Index is capitalization-weighted and is comprised of 31 constituents.