The current market offers no scarcity of risk and uncertainty.  As equities gyrate in a pattern of lower highs and lower lows, the credit market has dealt with its own bear market.  Yet despite the weakness in financial stocks, investors have quickly found relief in commodities which continue to hold up well despite the carnage.  According to many financial journalists and reporters, there are viable reasons for higher prices in these areas.

Oil is reportedly much higher due to the demand of industrialized nations for energy.  As more of the earth’s population begins to demand energy related products and services, the demand for oil and natural gas will continue to push prices higher.  While the logic certainly has merit, there is more to the story than can be encapsulated in a supply demand argument.

Grains by the same token are in a bull market with corn and wheat hitting new highs and farmers facing difficulty because of the higher price to feed livestock, procure fertilizer, and water crops.  Higher prices are a direct result of the ethanol stimulus right?  As crops are increasingly being used to supplement our oil dependence, the same crops are not being allocated to food manufacturers thus pushing prices higher and crimping the margins of companies such as general mills and others.  But once again there are more forces at work besides simply a higher demand for goods pushing prices higher.

Gold and other precious metals have been on a bull run for a matter of years now.  Analysts point to investor distrust of financial assets and the problems associated with a paper currency.  Gold, some say, is the only true measure of value and one of the most efficient ways to safely store that value despite fluctuating currency, equity, or commodity prices.  While there are many different viewpoints on this topic, suffice it to say that gold is not simply up because investors have distrust for their financial assets that otherwise would be parked in equities or fixed income products.

To fully grasp the environment we find ourselves in, investors (and US investors particularly) need to take a step back in time to the tune of about 520 years ago.  At this time the conventional wisdom was confident that the earth was flat and the sun revolved around the earth to produce morning and evening.  Because no one had truly challenged this viewpoint, scientific study simply accepted the theory as fact and as such, many astronomers were likely held back from truly understanding the complexities of our solar system.  In fact, in some civilizations to merely suggest a different view of the solar system would be considered heresy.

I am afraid that American investors tend to view the US dollar much the same way the medieval mind looked at the earth.  To our sharply trained eye, the price of gold, oil, grains, steel, and more continue to rise.  We have a hard time comprehending how much higher these markets can climb as prices seem to reach new records on a near daily basis.  But our view is likely distorted due to our reference point.  Similar to the view of the earth as the center of the universe, our natural tendency is to view commodities as dollar denominated assets.  This view is not relegated only to US based investors.  Around the world, commodities such as crude oil and troy ounces of gold are primarily denominated in dollars.

One way to look at soaring prices may be to take the perspective of one in a glass elevator.  As one steps into the car from the 120th floor and begins to take the ride towards the ground floor, it would appear the buildings around are growing taller.  We would consider this viewpoint absurd because it is obvious our perspective is changing, but the same situation is happening in our financial system.  As interest rates are dropped to prop up economic growth, the dollar becomes less valuable as a currency.  Since roughly two thirds of the worlds currency reserves are denominated in dollars, this becomes a serious problem – especially if it leads the powers that be to find alternatives for these reserves.  The falling value of the dollar by definition makes all hard assets become more expensive on dollar denominated terms.  At the same time, dollar producing assets (think shares of companies that earn dollars) become less valuable because their cash flow is denominated in weak currency.

So if this is true, how should US based (or international) investors position themselves to create wealth?  Aside from holding alternative currencies (which is likely a wise move at this point), investors should be diversified into equities that produce cash flow in other currencies.  Examples may be ADR’s of European or Asian corporations, or for some it may be attractive to open a brokerage account denominated in Euros which can trade on the German, London, Japanese or other exchanges.

The bottom line is that investors need to begin to think outside the box enough to realize that dollar based economics is only seeing part of the picture.  Instead of becoming frustrated about higher prices for hard goods, investors can capitalize on these trends and create true wealth regardless of how much oil or gold a dollar (or a thousand dollars) will buy.