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Paragon Commentary

Futures File: Lumber, Inflation & Gold Higher

Feb 07, 2017

Lumber Knocks Higher

The trade in wood has been good to the bulls recently, with lumber futures reaching a two-year high this week. Prices are exploding as the U.S. wrestles with a looming shortage of the building material and rising construction demand.

Much of the lumber used in the United States normally comes from Canada, the world’s largest exporter. That supply could be threatened by an expiring trade deal, resulting in tariffs being levied against Canadian lumber.

So far, the U.S. and Canada have not been able to reach a new deal, and President Trump’s concerns about NAFTA could block an extension of the status quo. U.S. lumber producers would prefer a protective tax on imports, which would boost their domestic industry, while much of the construction industry wants continued access to plentiful and cheap Canadian timber.

As a result of this uncertainly, lumber futures were hoisted near $250 per thousand board feet, the highest price since late 2014.

 

Inflation Returning, Sign of Health

Recent reports suggested that inflation may be returning to the major economies of the world, a sign of stronger economies in America, Europe, and Japan. Most notably, prices in Europe rose 1.8% over the last year, while wages in the U.S. jumped by 2.2%. These figures are largely in line with economists’ target of 2% growth, a figure that represents controlled growth.

One major factor in the rising prices has been rebounding energy costs. Over the last year, crude oil has doubled from a low near $26 per barrel to Friday’s price over $54. Because energy expenses filter into almost every sector of the economy, the price of oil is especially important to economists.

Adding fuel to the inflationary fire this week, the U.S. Federal Reserve kept interest rates unchanged on Wednesday. Low interest rates can stoke inflation by encouraging purchasing and borrowing, whereas higher interest rates reward saving money. As a result, the U.S. Fed depends on its ability to raise rates in order to slow down inflation, should it outpace their 2% target.

On the heels of rising inflation expectations, gold prices neared at three-month high at $1224 per ounce on Thursday. Investors frequently flock toward the yellow metal as a safe haven in times of inflation, expecting gold’s price to keep pace with inflation while paper dollars are worth less.

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