Inflationary Era Over?

Reflecting a major reversal in attitudes regarding inflation, many commodity markets tumbled this week. Whereas a year ago inflation-wary investors shifted funds into precious metals, grains, and crude oil, many saw this week's rapidly-cooling markets as an opportunity to take profits and sit on the sidelines.

Gold, perceived to be a classic hedge against inflation, was down as much as $115 per ounce this week. European debt crisis fears were cited as the proximate cause. Thursday, French central bank president Christian Noyer squabbled with the British over which country's debt should be downgraded first. Rather than trying to guess whether Europe's next bailout package may include U.S. style quantitative easing measures, many investors decided to divest themselves of the yellow metal and lock in profits won earlier in the year. As of Friday morning, February gold futures were trading at $1590/oz, down $125 on the week.

Other key economic staples scraped bottom this week. Active wheat and soybean futures contracts hit 12-month lows, March corn futures ground to 9-month lows, and natural gas futures hissed to their lowest point in more than a year. If the declines continue, the financial buzzword may shift from inflation to deflation.

Crude Oil Swerves South

Crude oil traders were whiplashed this week by fleeting geopolitical intrigue in the Middle East this week. On Tuesday, rumors swirled that the Iranian military intended to shut down the Strait of Hormuz, a channel of water through which nearly one-third of the world's oil shipments travel. Fearing that Iran could strangle the global crude oil supply, prices skyrocketed $3 per barrel in less than an hour, peaking at $101.25. A subsequent Iranian denial sufficiently convinced traders to dump their positions almost as quickly as they had bought them, causing a major price decline.

Crude's about-face was accelerated the following day when the Organization of Petroleum Exporting Countries (OPEC) announced that it was going to maintain its current high oil production. With the fear of an Iranian crisis subsiding and confirmation that the world's largest oil exporters were going to keep the "black gold" flowing, crude oil collapsed to $93.39 by week's end, down 7.8 percent from its high.