The S&P/GSCI index of commodities has risen almost 3 per cent since mid-August, in part in the hope that the Fed will respond to high unemployment and signs of falling manufacturing activity by printing more money, some of which - it is hoped - will be used to buy commodities.
The Fed itself has doubted that QE affects commodity prices. It claims that fundamental supply and demand determines prices, rather than speculation unleashed by the money it prints. But there are two channels through which QE probably does raise commodity prices.
One is that it reduces yields on Treasury bonds; Fed chairman Ben Bernanke said last week that the first two rounds of QE had reduced 10-year yields by at least 0.8 percentage points, with knock-on effects on other yields. But lower yields on bonds reduce the opportunity cost of holding commodities such as gold, and so should raise demand for them. Secondly, Mr Bernanke says QE has given "meaningful support to the economic recovery" and anything that boosts economic activity should also raise demand for industrial commodities.
The danger for commodity speculators is not so much that QE does not affect commodities but that the Fed might elect not to embark upon it just yet. Norman Villamin, chief investment officer, Europe at Coutts bank, says there's a danger the market will be "disappointed" if the Fed holds back next week.
