The Commodity Markets and the Link with Forex Currency Exchanges

Commodities today are a diverse group of international markets that operate quite separately from each other. Oil is one that is pertinent to all economies as a source of fuel but that is also regulated by producers stock piling, global production, and consumption. Gold on the other hand is one that is of relatively modest consumption but one that retains a tradition for security as a holder of value. The value of commodities however are dependent upon the currency they are exchanged for and when that currency is weak the commodity will appear to be very expensive and sometimes mistakenly, very valuable.

Online PR News – 27-September-2011 – – At experienced consultants will confirm that part of the advantage of having a reserve currency lies in having major commodities that are traded around the globe denominated in that currency. The United States enjoys that privilege to date however, this relies on the $US retaining value in real terms across the international community. To this end unfortunately, the $US does not. Across the forex currency exchanges of the world it has lost value.

After the collapse of the US property market in the Sub-Prime mortgage fiasco in 2007, a number of major US financial institutions collapsed, which due to their risk management profiles, saw the demise of numerous affiliated institutions across the globe. Commonly known as the Global Financial Crisis, the world economic cash flow came to a halt as fear gripped the entire global market.

All the major economies used economic stimuli to revive demand and lubricate the wheels of lending, and the US was no exception. However the US economy while showing some signs of life has not recovered to her former self and yet continues to increase debt in the process. This recipe for financial disaster has been met with caution from all and sundry not the least of which has been a recent financial downgrading by ratings agencies and a caution by the World Bank.
In the wake of this unpopular turn of events, the $US dollar has been heavily discounted by FX brokers and on forex currency exchanges to remain at historic lows for some months now.

Given that major commodities such as gold and oil are denominated in $US, the natural progression from a dramatically weak $US dollar is a far higher value ascribed to the commodity as more $US dollars are required to purchase the same amount of that commodity. Gold for example has sky rocketed to a historical high of almost $1900 per oz. Oil also has escalated in value but has consolidated somewhat in $US dollar terms as production and consumption is far more connected to its sustainable price than they are with the gold market.

Forex trading of the $US dollar is also freely convertible into the other currencies of the world. This is reflected in the price of almost every major currency experiencing an increase in value against the $US dollar. It is this consistent trend in the $US that makes the value of gold a function of the market opinion by the FX trading market regarding the $US dollar, not that there is any real increase in the value of gold. When compared to the prices of other currencies, gold will be seen to remain reasonably stable.

Traditionally commodities have been seen as the inputs to production that determine the overall corporate profitability and subsequent economic growth. At times of insecurity, precious metal commodities have been favored as a flight to quality mentality takes place for safer investments. Forex trading will increase markedly at these times.

Yet today, the global economy has evolved into something far more complex. Advisers at notice that commodity prices, while affecting some industries such as manufacturers using agricultural commodities profoundly are often reflected in a nation’s balance of trade figures. When flows of capital through export earnings are overshadowed by imports, it will take swift monetary policy decisions to stem the flow of capital out of the country through inflationary concerns. Similarly, when economic growth in a wealthy exporting nation isn’t matched by the appropriate balance of government spending, inflation can strike to erode the gains that have been made.

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