Gasoline prices have been going up, up and away since the start of 2009. It’s about the only commodity that’s sustained such a strong upward trend in prices over this time.
The question is: will all commodities follow gasoline higher or is gasoline overextended and due for a crash?
I think the former and here’s why…
We’re clearly in a deflationary environment, with debt deleveraging and falling asset prices. At the same time, the Fed’s stimulatory efforts are brewing inflationary pressures just below the surface. So I stay on the lookout for any sign of the resurgence of inflation.
I do this by watching two things – commodity and bond prices.
Commodity prices increase with inflation. Bond prices decrease with inflation. By taking a ratio of the two I have a handy indicator of inflation. That is, when inflation is increasing, the ratio increases.
Take a look…
As you can see, gasoline clearly signals the building inflationary pressure since 2009.
After checking similar ratio charts of other commodities – gold, silver, corn, wheat, crude oil – I found that only gasoline is giving such a strong indication of inflation. This makes me think that gasoline isn’t overextended. Instead, it’s our canary in the coalmine.
Inflationary flare-ups, in the past, have typically begun with falling Treasury bond prices (rising interest rates), followed shortly by spikes in commodity prices. With the Fed’s thumb pinning interest rates to the floor, I’m not expecting a drop in bond prices just yet.
But it’ll happen.
Rates only have one way to go – up. When they do, watch for commodity prices to jump.
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