Commodities Rally Complicates Fed's Battle

Updated from 6:59 a.m. EDT

With recession bearing down on the U.S. economy, the Federal Reserve's attempt to avert disaster may be creating another asset bubble in gold, oil and other commodities -- at least in the short run.

In the long run, early skeptics of the U.S. housing boom say the global boom in commodities markets is for real. But in the near term, the Fed's aggressiveness in easing monetary constraints and pumping emergency cash into a the shell-shocked financial system seem to be juicing those markets.

The trend calls into question Fed Chairman Ben Bernanke's strategy of easing rates in the hope that soaring prices for crude oil and other commodities will slow later this year and keep a lid on expectations for inflation.

Jim Rogers, a global investment guru and longtime commodities bull, says the Fed's easy-money policies are driving up prices in oil, precious metals and agricultural products because "they are printing huge amounts of money which makes people flee paper money."

For Rogers, the author of Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market, the recent record lows posted by the U.S. dollar against other major currencies is only "icing on the cake" for the global commodities boom.

"[Supply and demand forces] ensure a bull market no matter what happens to the U.S. dollar," says Rogers. "Massive foreign debts [for the U.S.], huge trade deficits, and a central bank printing huge amounts of money sends a loud message to the world that the U.S. does not care about the dollar and will debase it."

For his part, Rogers recently sold his home in New York City for $15.75 million, having reportedly purchased it in 1977 for $107,300. He's now in Singapore, where he's been railing against U.S. monetary policies. He concedes that further economic deterioration in the U.S. and around the world, or a reversal in Fed policy, could spark a temporary selloff in commodities, but he says that would only amount to a "consolidation in a secular bull market."

Just such a consolidation already occurred in crude oil futures trading on the New York Mercantile Exchange in 2006 -- around the same time that the housing bubble began to deflate. Prices hit a peak that spring at over $75 a barrel and tumbled down to around $52 in January 2007, prompting many speculators to declare a premature end to the stunning bull run in energy markets that also began in earnest around the same time that the U.S. residential real estate market kicked into high gear in 2002-03.

The S&P/Case-Shiller U.S. National Home Price Index rose 63% from the start of 2002 to its peak in the second quarter of 2006. During the same period, which began as the Fed was cranking down its short-term rate target to a record low of 1% for a year straight, crude oil prices rocketed up 267%.

While home prices have turned sharply lower this year -- posting their largest declines on record since the Great Depression -- the selloff in oil was short-lived. Crude futures shot back up by 55% in 2007. Since the Fed started lowering rates in September, oil prices have jumped by 32%.

While the stock market was celebrating the Fed's unprecedented offer Tuesday to lend as much as $200 billion in Treasury securities to prime brokerages like Goldman Sachs(GS Quote) and Lehman Brothers(LEH Quote) in return for mortgage-backed securities that have been spurned by the market, crude oil futures were bubbling up to a new record high of $109.72 a barrel.

The dollar plunged Wednesday to fresh record lows, with the euro topping the $1.55 level for the first time in its history. Gold futures rose to $977.80, having spiked by around 35% since Fed easing began. Prices for wheat, corn, soybeans, cotton, cocoa, coffee and a host of other commodities have also been on a tear.