Stocks, Bonds, and Commodities, Oh My!

The last four months have been highly unusual for commodity, stock and bond investors. Typical mantras like "Stocks and bonds go in opposite directions" or "Gold goes up when stocks go down" have been thrown to the side as almost every market has been gearing steadily higher. Since late June, stocks, bonds, precious metals, and food prices have all been working in near-lockstep, heading sharply higher, all as the U.S. Dollar has been dropping into new low ground.

This has been fueled primarily by the focus on the U.S. Federal Reserve and its monetary easing policy. The Fed is essentially trying to fuel U.S. economic growth by keeping interest rates extremely low. Bond prices move inversely to the interest rate, so our current historically low interest rates are pushing bonds to historically high values. Low interest rates also allow corporations to borrow money and expand their businesses at extremely low costs, helping their share values.

Finally, corporate expansion has fueled demand for hard assets, while the extremely low interest rates are giving rise to fears that inflation could soon rear its ugly head. The expectation for economic growth and fear of runaway inflation have caused a general surge in investment interest in gold, silver, copper, crude oil, grains and livestock.

Many economists warn that this pattern cannot continue forever, and that the ensuing "correction" could result in a rapid drop in the price of any one or all of these sectors. Yet for now, investors are along for the ride, counting the profits that they've accumulated buying stocks, bonds, and commodities over the last four months.

Aussie Dollar Benefits from Chinese Demand

Riding on the back of a giant mining boom, the Australian dollar hit a 28-year high this week. Global investors see investing in Australian dollars as a way to benefit from Australia's rich mineral deposits.

China, which is Australia's largest trading partner, is expected to experience a 10% growth in GDP during the 2nd quarter of 2010. Considering China's large population, demand for Aussie coal, iron ore, gold, wheat and cattle is not expected to dry up anytime in the near future. In the past 6 weeks, the Australian Dollar has appreciated 11% against the U.S. dollar, reaching a high Friday of $0.993.