There’s no way to sugar coat it: Commodities are crashing.
Crude oil just slumped to $36-and-change, the lowest since the depths of the Great Recession.
Copper is flirting with $2 a pound, a level we haven’t seen since May 2009.
Iron ore is going for less than $40 a metric ton. That’s the cheapest since current pricing standards were adopted.
And the broad-based Bloomberg Commodity Index – which tracks the value of 22 different resources — just sank to its lowest level since 1999.
These declines are disastrous for commodity stocks, commodity currencies, and commodity economies. Countries like Canada, Australia, Brazil, and Russia are reeling, with massive job cuts, loan defaults, and regional recessions hitting hard.
But what does it all mean for interest rates? Will crashing commodities cause rates to plunge, too?
Well, commodities prices are a key input in the pricing of a wide range of products. Oil, copper, iron ore, lumber, aluminum, wheat, corn and natural gas – they’re ultimately turned into everything from gasoline to breakfast cereal, or used in the production of everything from buildings and houses to cars and computers.
So when commodities prices are surging, it tends to push up broader inflation. That, in turn, helps put upward pressure on interest rates.
Commodities prices are also a useful economic indicator. If pricing is rising for all the inputs that go into the products we consume, it stands to reason that demand is strong and supply is tight. That’s a powerful sign of economic growth – something else that puts upward pressure on interest rates.
But the opposite is occurring right now, as I noted earlier. Commodities prices are falling across the board. That means all else being equal, deflation and recession seem to be winning the economic battle.
So to answer the question I asked earlier… yes, long-term interest rates could fall along with commodities prices. That may even happen despite short-term Federal Reserve rate hikes.
If you’re confused as to the reasons why, my interest rate course “How To Profit From Rising Interest Rates”, will help you out. It explains how you can profit from changes in relative rates, the direction of rates, shifts in the economic environment, and more.
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Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the editor of Safe Money Report and Interest Rate Speculator at Weiss. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.