Tuesday, June 15, 2004

To support the General's basic deflationista sentiments, I also offer the decline in global commodity prices over the last two months.
Beginning last year, strong demand for raw materials in China, the United States and elsewhere drove commodity prices through the roof, to multi-decade highs in many cases, and helped fuel some of Wall Street's fears that inflation was about to make an unwelcome return.

But since peaking in early April, the Commodity Research Bureau's broad commodities index has fallen 5 percent, while gold futures on the New York Mercantile Exchange have fallen more than 10 percent.

Copper peaked earlier, on March 1, and has since dropped more than 15 percent. Soybean prices are down about 18 percent since peaking in late March. Cotton prices have fallen some 9 percent since their early May top.

Some analysts believe the lower prices are here to stay, saying some of the earlier gains were a little bubblicious, driven by some trader speculation that's since been squashed.

Meanwhile, the U.S. dollar has strengthened and in the process it has driven commodity prices lower by increasing the amount of stuff a dollar can buy. And the Chinese government has apparently succeeded in tapping the brakes on its economy's mammoth growth, cooling global demand somewhat.

"I don't know that we'll see those high prices again for the foreseeable future, and we're into a sideways price trend now," said Frank Lesh, commodities trader at Rand Financial Services in Chicago. "Though prices are higher than in early 2003, they're definitely down to much more manageable levels."
If China's cooldown is for real, we should see a return to sanity in raw materials markets and a return to the general global logic of deflation as well.

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