Fed Chief Bernanke has been adamant that rates will stay low for a while. But that doesn’t mean forever. And we know he’s already testing the waters for removing stimulus.
The best possible outcome here is that employment and the economy grows without sparking inflation and the Fed can raise rates without having to acknowledge that inflation is a threat.
*****That’s probably wishful thinking, though. Oil prices are very sensitive to economic numbers, even more so than to the U.S. dollar. When the economy shows signs of strength, oil prices automatically rise because investors assume a stronger economy means more demand for oil.
It’s no surprise that oil prices are higher today. And as the economy improves, tthey will go even higher. I’d say it’s likely that by the time the Fed raises rates, oil prices will be over $100 a barrel and we’ll be seeing oil-related costs (like food) on the rise.
It’s hard to imagine oil trading significantly lower at this point. Oil either rallies as the economy improves or it at least stays stable as the economy struggles and the dollar remains weak.
*****Gold will be another asset to watch carefully. Gold’s off sharply today as the dollar rallies on the good employment news. But like oil, it’s hard to paint a truly bearish picture for gold going forward.
It’s likely that inflation will pick up at some point, and that will support gold prices. Plus, we are seeing central banks from India, Russia and China adding to their gold holdings to help diversify their foreign currency reserves. And finally, it should not be forgotten that global economy is far from healed.
New shocks to the economic system could very easily arise. Europe could enter a recession, U.S. banks could falter again under the weight of delinquent loans and foreclosures, commercial real estate could collapse – there are any number of crisis situations that remain in the realm of possibility. And any of these could send gold prices much higher…