This page has been archived and commenting is disabled.
The Certain Shame of the Ongoing Commodity Boom
by John Tamny, Toreador Research and Trading (VE Guest Contributor)
In The Seven Fat Years, the classic account of the U.S.’s economic revival in the 1980s, the late Robert Bartley addressed the economic hardship experienced in the 1970s, and specifically spent time on the oil spikes that occurred during the lost decade. Of great importance, Bartley made sure to put “spikes” in quotes when describing the major run-up in oil prices.
While to this day economists and media members attribute nosebleed oil prices in the ‘70s to conflict in the Middle East along with mythical OPEC oil embargoes, Bartley knew well that neither made oil and its byproducts such as gasoline expensive. Instead, Bartley was very clear in noting that oil’s rise wasn’t a problem of scarcity in the ‘70s, rather it became nominally expensive in concert with the dollar becoming cheap.
Indeed, if scarcity had been the driver of the oil “spikes”, it’s only natural that with oil rising in price, other non-oil commodities would have fallen in price owing to the tautological truth that increased demand for scarce oil would have led to reduced demand for other commodities. That the dollar cost of commodities from wheat to meat to soybeans all skyrocketed alongside oil signaled that far from a problem of scarcity, commodities were becoming expensive thanks once again to a weak dollar.
The ‘70s history is relevant given the views of some economic commentators today who are suggesting that the present commodity boom is a signal of global economic growth driving up prices across the board. If this argument is to be believed, the fact that rubber, cotton, copper, tin, and gold are at all time highs signals scarcity wrought by global growth.
The problem with this supposition is the same as it was in the 1970s. If demand for one good is bidding its price up, by definition demand must be lower for other goods, thus bringing their prices down.
And if a broad range of commodities are rising, far from signaling strong demand, the true signal is one of monetary error. Put simply, commodities are rising and have been rising all of the 21st century precisely because the dollar has been weakening. We’ve been inflating for most of the new century, and continue to do so.
Interestingly, some commentators have even suggested that gold hitting an all-time high is a certain signal that the global economy is showing great strength. The view there is that if the economy were weak, demand for gold would be in decline alongside a fall in its price.
In this case, the commentary suggesting the gold spike is a symptom of growth perverts how gold moves altogether. If this supposition were remotely true, gold would not have been used as money as it has been for thousands of years.
In truth, gold’s unique stock/flow characteristics make its real price impervious to demand. Thanks to nearly every ounce of gold ever mined still being in existence due to gold having very little in the way of industrial uses, the roughly 150,000 metric tons (stock) of gold on earth today are not impacted in terms of price by new annual discoveries (flow) that are a tiny fraction of the total amount of gold in the world, not to mention demand.
Instead, when the price of gold moves, it’s not the yellow metal changing in value; rather gold-price fluctuations reflect a change in the value of the currency in which it’s being priced. In dollar terms, when gold rises the dollar is weakening, and when gold falls the dollar is strengthening.
Over the last four decades global growth was greatest in the ‘80s and ‘90s, and weakest in the ‘70s and the decade just passed. Notably gold did best during the weak decades, and worst during the strong growth decades, thus discrediting the notion that economic productivity is what drives the gold price up.
The above in no way should surprise us. When money is devalued, it’s only natural that investment in productive ideas would disappear on the margin. Instead, investment flows into hard, unproductive assets least vulnerable to devaluation along the lines of gold, art, and even rare stamps.
Or more to the point, investment in the metaphysical economy of the future declines as investors seek safe haven in the hard, tangible assets of the past. Is it any wonder that inflation always correlates with weak economic growth?
Notably, the Wall Street Journal recently ran an article in which it described a major increase in the mining of gold around the world. With currencies declining globally, investment is flowing toward the parts of it where gold is most likely to be found. Demand for the metal is high, because as mentioned earlier, gold rises in nominal terms when currencies decline.
This should concern all readers. Indeed, thanks to a rising gold price which is solely the result of a decline in the value of the dollar and all other paper currencies, a growing amount of human and financial capital is being shifted toward mining what is already a plentiful commodity.
Economically, nothing could be more harmful. Indeed, not commented on enough is the tautological reality that investments in gold exploration will not cure heart disease, will not lead to software innovations that enhance business productivity, and they will not open up foreign markets. Instead, gold investments are solely a defensive concept meant to protect existing capital from further debasement.
At present there is a major run occurring on the currencies of the world. Commodities most sensitive to monetary error are loudly signaling this run. This broad currency decline ensures more investment in non-productive assets of the earth, and less in the economy of the mind that is so essential to innovation and progress.
In short, the commodity spike, far from a signal of economic health, is a flashing signal of a looming global recession as capital grows more defensive. So let’s not be fooled. Commodity strength signals an ongoing economic decline that can only be reversed by sound money policies that reverse what is a bull market for defensive assets.
About John Tamny: 
Mr. Tamny is a senior economic advisor to Toreador Research and Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channel
- advertisements -
The price of commoditites is likely the sum of many different factors. Perhaps two of the largest would be supply/demand fundamentals and speculation due to the run-up of prices. I don't think it's safe to supply a narrative based on the price of commodities without having a solid grasp of what exactly the factors are and their relative weighting. I'm skeptical of the claim that monetary factors are a dominant factor.
Nonsense. What's he doing here, rewriting history. Then why was there gas rationing and shortages if there was a "mythical" embargo?
The Seven Fat Years was a joke, with misleading and slanted evidence designed to reach a pre-approved outcome.
all true. platinum is a good indicator of automation advancement.
http://covert2.wordpress.com
Interesting, except that the fundamental axiom on which your argument is based, namely "the tautological truth that increased demand for scarce oil would have led to reduced demand for other commodities"....
isn't true.
Granted, it is a common fallacy, commonly parroted, and commonly drilled into the heads of Econ 101 students. But true, in reality, it ain't.
-1000
Actually, if the money supply remains constant (which it doesn't) it should be true. Given that productivity grows over time prices should always drop as manufacturing, extraction, services, etc. all improve. If we had just the same amount of money that was available at the American revolution then a car would probably sell for $100.
If someone spends more money on one thing then they necessarily spend less on something else, including savings. Or, like government they can accrue debt but that is still a draw on future earnings.
However, I like the concept that as inflation rears its ugly head we invest in the past/safe havens versus the productivity of the future. This is something very interesting to contemplate. I like thoughtful pieces like this.
Those who disagree should document the error, not simply say it is wrong.
I also agree with the author's basic premise.........
Investing in Gold to protect against a debasement of the domestic currency is an incredibly selfish thing to do, not to say that any rational, economically savvy citizen would not do the same if the means were available. I think his point is that an investment in gold is not going to produce any of the things that most here would suggest a fiscally responsible, domestically focused and commonly supported government would produce.
But I don't understand his comment about increasing gold prices crowding out pricing increases for other commodities.
Bill
Agreed. My experience of the oil crisis was that as dad spent more on gas, we got fewer toys.
QED.