Commodity Watch: Commodities & Dollar Tango

AHMAD AL-SATI
PORTFOLIO MANAGER

Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York. 

Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser. 

In 1970, the US was running out of gold. The US dollar (USD) had been pegged to gold at $35/oz since the end of WWII, but USD supply increased as the US printed it for foreign aid, foreign investments and the Vietnam war.

By 1970 the global volume of USD was more than US gold reserves could support. The USD was overvalued, and countries wanted their gold back. Switzerland redeemed some gold in 1971 before exiting Bretton Woods, the UK asked the US government to deposit its gold at the New York Fed instead of Fort Knox and France sent a battleship to collect its gold (true story).

After a series of secret meetings at Camp David with his economic team (including Burns and Volcker), Nixon decided to break Bretton Woods. The goal was to “create more and better jobs; … stop the rise in the cost of living; [and…] protect the dollar from the attacks of international money speculators.” To accomplish that the administration decided to:

1. Suspend convertibility of USD into gold;
2. Freeze prices and wages for 90 days, via executive order; and
3. Impose a 10% import surcharge to protect US manufacturers.

The measures, popular at home, caused concerns overseas. Nixon declared “If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.” 

Breaking the gold peg marked the end of US equities’ outperformance, as commodities shined. The 1970s was a difficult decade for US industry and US equities, as the USD lost 32% of its value between 1972 and 1978, with high inflation and unemployment persisted. Yet, global trade continued to flow and accelerate throughout the decade. Ultimately, the beneficiaries of a lower USD were commodity producers (companies and countries), both of which thrived as commodity prices increased by 3x.

The inverse relationship between USD and commodities remerged in the 2000s. Capital inflows into the US during the 1990s (to buy tech companies among other things), caused the USD to rally and commodity prices to drop. But after the bubble burst and the US Federal Reserve lowered interest rates to 1%, the USD proceeded to lose ~35% of its value over 6 years. US equities lagged that decade. In contrast, commodity prices increased by 2x and emerging market equities rallied to new heights (Brazil’s stock market increased by ~2000% including dividends!).

YTD, the USD is down 8% - it was moving lower even before last week’s volatility. As investors evaluate the USD’s role as a safe haven and investors perceive the US as less attractive (mistakenly perhaps), the USD may continue to drift lower. And if historical patterns persist, US equities could lag, as commodities and emerging markets rally. Things may reverse, but regime change can be an opportunity to recalibrate exposures and portfolios.

The above article is an extract from a LinkedIn post by Ahmad Al-Sati from 13/04/2025.