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Base Metals Price Rebound on Horizon?

by Bradley Voight on 07/29/12

U.S. stock markets increased by over 2.5% in two days to end last week and gold rose from $1570 to $1625 per ounce, a 3.5% move. Both events came on the heels of European Central Bank officials announcing that they stand ready to provide financial support to ailing eurozone member economies. This news coupled with the Fed hinting at another round of 'easing' could mean that sagging base metals prices could be in for a lift also.

In plain english, the central banks of two of the largest economies have promised to expand the money supply. The more dollars in circulation the less each one is worth, which hurts the spending power of each dollar, but it also allows asset prices to increase. Real assets such as metals, grains, oil, and industrial materials will increase in price. The bad news is these are the raw materials of everything you and I need, so the cost for us to live will increase.

In the case of the Federal Reserve, we say they 'print' money. Actually they just type the number of new dollars they want up on the screen and there it is. They then use this 'new' money to loan to national banks. In order to keep the interest rate low on these loans, the Fed creates more money and uses it to buy U.S. treasury bonds. This is done because the 10 year treasury bond is where interest rates on mortgages and other consumer non-consumer borrowing activity come from.

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