Falling Commodity Prices undercut Gold and especially Silver

I have been posting a chart of the broad commodity sector for many years now here on this site and elsewhere. Earlier on, I employed my favorite, the Continuous Commodity Index or CCI, which unfortunately died an untimely and unheralded death at the hands of its originators. I have recently moved over to employing the Goldman Sachs Commodity Index in lieu of the more widely known CRB index, which I believe is far too heavily weighted in energies to paint an accurate picture of the broader commodity complex.

Regardless of the reasons I have chosen, the chart speaks for itself. Commodity prices are going no where to the upside. They have not broken down decisively to the downside either but the chart looks like it is leaning lower than higher. This fact, and the fact that the US labor markets are atrocious, is what is undercutting both gold and especially silver.

I have said it many times now, silver must have an inflationary environment if it is to thrive. That is lacking and as long as it is, silver is going to UNDERPERFORM gold.

Also consider something else when you view this chart - the US Dollar is trapped in a broad sideways range between roughly 79 on the bottom and 84 on the top. Currently it is working in the lower portion of this range. In the past Dollar weakness has led to widespread buying of commodities across the board, irrespective of their fundamental supply/demand equation. That is no longer the case. Buying commodities merely because the US Dollar is weaker is no longer a wise option as the markets are beginning to focus more on the fundamentals of specific commodity markets. That in itself is healthy in my opinion as hedge fund buying in the past has skewed price discovery and is not healthy for any commodity over the long haul as it sends false signals to the industry.

Speculative driven rallies in any commodity lead to exorbitantly high prices which foster more production. There is a definite time lag but it is nonetheless axiomatic. We are seeing that now across many individual commodity markets.