He began with a graph showing the prices of metals, agricultural commodities and energy commodities all declining through the 1980s and ‘90s, increasing in the early 2000s, then falling during the Financial Crisis.

The similarity in price movements owes, in part, to the overall level of economic activity, Frankel asserted. For instance, an expanding economy brings greater demand, and hence higher prices, for industrial metals, energy and other raw materials. Changes in GDP explain “some of the big [commodity] price swings since 2000,” Frankel said. “But there’s more going on.”

Changes in the real (after-inflation) rate of interest also impact commodity prices, and the relationship is inverse, according to Frankel’s decades-long research. Higher rates, for example, make it more expensive for businesses to carry inventory, so they sell down their inventory, which drives commodity prices lower. Frankel found this relationship to be strong for a range of commodities, from oats to copper to cattle.

The value of the dollar is a third macroeconomic variable that affects commodity prices. When the dollar depreciates, internationally-traded items such as commodities become more expensive in dollars. The opposite occurs when the dollar gains in value.

“I see real commodity prices going down the next few years,” Frankel concluded. As the Fed continues to tighten, interest rates will rise. He expects a stronger dollar, too. Both of these portend a drop in commodity prices.

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