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Guest Post: Commodities Look Set To Rocket Higher
Submitted by Chris Martenson
Commodities Look Set to Rocket Higher
I've been asked to comment on the work of a few noted deflationists who are calling for a top in commodity prices here. Their argument is pretty clear cut: Because inflation is a function of available money plus credit (their definition), and because credit has fallen, deflation is what comes next. When looking about for things to deflate in price, commodities are an obvious candidate for attention because they have risen so much over the past decade.
In this view, three things have to be true:
- Demand for commodities has to fall below supply. After all, as long as demand exceeds supply, prices will typically rise.
- Money, including credit that would normally be used to buy commodities, has to shrink. That's the definition of deflation that we're analyzing here.
- People's preference for money has to be greater than their preference for 'things,' with commodities being very obvious 'things.' That is, faith in money has to be there or people will prefer to store their wealth elsewhere.
These are all just versions of the old supply/demand argument for commodity prices, except that our consideration also includes the important element of the Austrian economic view of demand for money.
There are several reasons why I think there are serious holes in each of these conditions. Enough to warrant a healthy degree of caution in one's certainty about what 'must' happen next to commodity prices. Full disclosure: I continue to have 75% of my total net worth locked up in gold and silver, so I am decidedly in the camp that does not believe the commodity surge has yet run its course.
A Technical Challenge
Before we tackle each of those three conditions from above, let's look at the chart for the Continuous Commodity Index (CCI) to see what it might be telling us.
First, let's examine the period after the great bust of 2008 (a liquidity-driven event) and note that commodities essentially rose during all of 2009 and then formed a classic 'bull flag' formation in early 2010.
It should be noted that calls of commodity "topping" were also made at this time by several prominent deflationists. However, a topping pattern and a bull flag are very different beasts. So I was quite content to keep my calls for more commodity price increases intact at this time, even though they spent six months trending lower in this consolidating pattern, because the chart looked quite bullish to me.
And I was watching the near-daily Fed injections of thin-air money into the system, reading about surging Chinese demand, and tracking our negative interest rates at the same time -- all features that are supportive of higher commodity prices.
Note also in the above chart that the RSI on top was in neutral territory and rising (green line above) and that the momentum indicator (MACD) was also rising (green line below), both of which are typically bullish patterns. None of this was at all consistent with topping. It doesn't rule a top out, naturally, in trading and markets anything can happen, but these are not the usual signs one expects at a top.
Now let's expand the chart out and see what happened next:
First, we might observe a 43% run-up in commodity prices over the next eight months following the bull flag we just dissected. Note that it is almost uninterrupted during the period from July 2010 to April 2011.
Second, we might ask ourselves what sort of a pattern we currently have in the commodity index chart. Rather eerily, because one rarely sees such a perfect repeat of patterns, what we see is another alomost identical bull flag complete with rising RSI and MACD readings.
On the basis of these technical readings, I would be extremely cautious in making a call for commodities to spike down from here. Instead the chart is pretty clearly calling for another run to the upside. Again, this might not happen, and commodities could always fall from here, but a bet made in that direction is fighting a pretty powerful chart.
Now let's turn to the fundamental reasons that support the idea of a bullish commodities chart.
Condition #1: Supply Exceeds Demand
A key component of the deflation argument is that with credit shrinking, demand will drop, leaving excess market supply that resolves with lower commodity prices. Housing in much of the Western world, for example, fits this definition nicely. Too much was built while prices ran too high, and the bursting of that bubble is now resolving itself through lower prices.
Commodities have a long and storied history of boom/bust/boom, with supply and demand alternately racing past each other as the lag times for developing new supply assure too much at some point and too little at others.
What's new in this story today is the emergence of a couple of new economic powerhouses with billions of citizens as new participants at the resource table.
India is one of them, and the recent 'bad news' out of there was that the Indian economy only grew at 7.7% in the most recent quarter:
August 30, 2011
India's economy grew 7.7% in the three months from April to June, compared with the same period of 2010.
It was India's weakest growth for six quarters, but still better than had been expected.
The manufacturing sector grew 7.2%, an improvement from the previous quarter, but well below the 10.6% in the second quarter of 2010.
While the 7.2% growth in the manufacturing sector was downplayed in most articles in comparison to the prior 10.6% growth, it is useful to remember that a 7.2% rate of growth translates into a full doubling over just ten years' time. In other words, in ten years, India's manufacturing sector -- the one that consumes lots and lots of natural resources -- will be consuming twice as much of everything as it does now.
It is this massive rate of growth that is eating into the world's remaining resources and creating competition for most basic natural resources.
As big as India is, and as fast as its rate of economic expansion is, it is dwarfed by China on both counts:
SINGAPORE/BEIJING (Reuters) - UBS cut its 2011 and 2012 growth forecasts for China on Thursday to reflect weaker growth prospects in developed economies, saying the central bank may relax policy if the world's second-largest economy falters.
UBS now expects 2011 gross domestic product growth of 9 percent, down from its earlier projection of 9.3 percent. For 2012, it sees GDP growth of 8.3 percent, down from its previous forecast of 9 percent, it said in a report.
(Source)
Again, while the emphasis in this article is on weakening growth, we should also be sure to note the absolute rate of growth here.
Global slump? What global slump? China is slated to grow its already huge economy by 9% this year (2011). If that rate of growth were sustained, China would double its economy in just eight years. Twice as much of everything would be consumed in just eight years.
When you are talking about 1.3 billion people doubling their intake of economic goods and services in just eight years, you are talking about the fastest absolute increase in demand placed on natural resources ever seen in world history. Faster and faster and faster; more and more and more.
What sorts of news items might we expect to accompany such a proposition? Perhaps some like these:
China's corn demand mindblowing
August 17, 2011
China's struggle to meet the growing demands of its middle class is fueling a sudden surge in demand for corn, sending vast ripples across the U.S. farm belt and potentially upending the grain's trade flows around the world.
China's need for corn -- which forms the basis of sweeteners, starch and alcohol as well as feed for livestock -- was on stark display in July when the nation ordered 21 million bushels of U.S. corn in one hit, more than the U.S. government thought the country would buy in a year.
Corn prices, which have nearly doubled over the past year, climbed another 1% Tuesday.
BEIJING, Aug. 15 (UPI) -- China's dependence on imported oil grew to 55.2 percent in the first five months of this year up from 55 percent last year, reports state-run news agency Xinhua, citing figures from China's Ministry of Industry and Information Technology.
In 2009, however, China's dependence on imported oil rose to 33 percent.
(Source)
China's Natural Gas Consumption Climbs 32 percent
Industrial Info Resources reports China's apparent natural consumption reached 11.1 billion cubic meters in July 2011, an increase of 32 percent from July 2010 and a 3 percent increase from June 2011, according to data issued by the General Customs Administration of China (GCAC).
As consumption increased, the import volume of natural gas also jumped from 15 percent to 25 percent over the same time period.
Securing uranium supplies still essential to China’s energy security
China has 14 operational nuclear reactors and according to the World Nuclear Association, 77 more reactors are either planned or under construction with aim toward increasing nuclear capacity to 80 GWe by 2020, 200 by 2030 and 400 GWe by 2050.
However, the nation’s domestic uranium resources don’t even come close to the amount needed to fuel such an expansion. To secure uranium reserves, China has been aggressively moving to sign supply contracts and joint venture mining agreements as well as to purchase uranium mines overseas.
By 2020, China is expected to account for 20 percent of global uranium demand, according to Resource Capital Research.
There are loads of similar articles covering China's aggressive expansion into Africa's resource plays, energy deals across the globe, and arable land where it is available. We're seeing exactly what you would expect from a major economy expanding like crazy: a rapidly growing, or, shall we say, exponentially increasing hunger for natural resources.
Perhaps a slump in the Western economies will suddenly flood the world with enough resources to cause a commodity crash, but perhaps not.
A Paradigm Shift
The supply-and-demand argument rests on the time-tested notion that with increased demand, new supplies are brought to market. This has more or less always been true, although astronomical prices will not get you a passenger pigeon and rising prices seem unable to drag more giant Bluefin Tuna from the seas. The point there is that the usual supply and demand argument falls apart in the presence of limits.
Jeremy Grantham, who previewed my book last fall and provided a blurb for its jacket cover, has been all over the news lately talking about a profound structural shift in natural resources:
Grantham concludes that the world has undergone a permanent "paradigm shift" in which the number of people on planet Earth has finally and permanently outstripped the planet's ability to support us.
Specifically, Grantham says, the phenomenon of ever-more humans using a finite supply of natural resources cannot continue forever--and the prices of metals, hydrocarbons (oil), and food are now beginning to reflect that.
In other words, Grantham says, it is different this time.
Grantham believes that the trend of the last 100 years, in which the prices of almost all major commodities have steadily declined, is permanently over. And from here on in, humans will be competing more--and paying more--for ever-scarcer resources.
From a societal standpoint, the news is far worse. Grantham believes that the planet can only sustainably support about 1.5 billion humans, versus the 7 billion on Earth right now (heading to 10-12 billion). For all of history except the last 200 years, the human population has been controlled via the limits of the food supply. Grantham thinks that, eventually, the same force will come into play again.
(Source)
Instead of oil being in a spiked-top formation ready to fall back to its prior range of $20-$30 a barrel, Grantham argues that oil has shifted to a new price level. I have argued the same thing, not by using price charts, but through the fundamental analysis of oil supply in the context of Peak Oil coupled with an understanding of the marginal cost of producing a new barrel.
If it costs $70 - $80 to produce a new barrel of oil, the price cannot fall much below that for very long.
So on the first deflationist point that supply of commodities will soon greatly exceed demand, I have to conclude that until and unless we see China's and India's economies fall off a cliff, the impact of bringing an additional 2.5 billion consumers to the global buffet of natural resources will provide ample pressure to prevent a sustained crash in prices. Perhaps we'll experience a short-term correction, especially if the Fed is stingy with its still-unannounced QE III program, but a long-term crash seems highly unlikely.
Condition #2: Money Plus Credit Shrinks
The second key deflationist assumption is that the supply of money plus credit will decrease. Central to this argument is the idea that it's insufficient to track the money supply alone and that it's essential to include the expansion (and/or contraction) of credit as well. This makes sense on the surface, because credit allows people to buy things and buying can translate into price pressures. More credit means more buying pressure; less equals the opposite.
But I have a number of difficulties with this view over the long-term. (Hey, credit has to be paid back at some point, right? So it's roughly neutral over the long haul.) This explanation is especially problematic for me when it is used in an overly broad way by lumping all credit market debt into a single spot and then saying, "There. Look. It's fallen. Credit is down, and that's deflationary."
The trouble I have with this view is that not all credit has the same impact on demand. Some credit leads to demand that directly impacts the CPI (inflation), and some does not. When we are talking about inflation, what most people care about is the price of things they use or consume (cars, food, gasoline, health care, houses, etc.), rather than financial instruments or paper assets (stocks, bonds, derivatives, etc.)
Let's put it this way: If you give someone a billion in dollars in credit, it matters significantly whether they go out and buy ten thousand silos of corn or one twentieth of the next ten-year Treasury bond auction. In the latter case, nothing much happens to everyone else's inflationary experience, but in the former case, the price of corn goes up. A lot.
In other words, credit extended within and among the financial community mainly flows within and among the paper assets of the world, while non-financial credit goes to consumers, businesses, and governments that use the credit to buy real things.
[Note: One aspect of financial credit takes us to the world of shadow banking, where financial institutions and purely financially oriented participants buy and trade financial instruments generally just within and among themselves, often with tremendous leverage.]
Whether credit-default swaps (CDS), traded within and among the shadowy world of purely financially motivated entities, are trending up or down in price has almost zero impact on the price of molybdenum or corn. Therefore it is important for us to separate credit into its financial and non-financial components.
On this basis, if we look at total credit market debt broken out into its two main components (financial and non-financial), we see that instead of credit falling in general, it has fallen only in the financial world, but has climbed by an amount almost exactly offsetting it in the non-financial sectors:
Yes, financial-sector debt has fallen by $3 trillion, and that is a drag on total credit market debt, but as explained above, we wouldn't expect this to have much of an impact on inflation for anything other than paper assets. Non-financial debt, on the other hand...
...has rather steadily climbed uninterrupted before, during, and after the Great Recession. Credit market debt within the physically consumptive portion of the economy has climbed by nearly $3 trillion, almost perfectly offsetting the non-financial decline. But the offset is just an interesting observation that really tells us nothing about the inflationary or deflationary effect of credit expansion/contraction on the things that are tracked in the CPI.
So on the basis of credit alone, I find the deflationary argument to be weak. There's been $3 trillion of new credit created in the consumptive portion of the economy since the start of the financial crisis in 2008, and it's almost entirely thanks to government borrowing. Not too shabby.
Money, Money, Money
Turning to money itself, the deflationary argument becomes a lot more difficult to sustain. Money is measured by the Federal Reserve in various ways that are called the "M's." M1 is the narrowest version, representing cash in and out of the banking system and demand accounts (savings and checking) at the bank. Just look at M1 lately:
The increase in M1 since the start of the financial crisis (red box) is the same as the entire accumulated supply of money that existed in 1992 (green box). That is, as much M1 money has been created in the past three years as was created from the founding of this country through 1992.
It's really hard to square up that data with a deflationary argument. I have to assume that at least part of the reason for the big increase in M1 is people like you and me taking cash out of the bank, necessitating the printing and distribution of more cash.
M2 represents a slightly broader definition of money:
M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs).
(Source)
A chart of M2 reveals a steadily increasing rate of money creation that has been especially intense over the past few months:
There is absolutely nothing deflationary in the M2 chart. It is exactly what we would expect to see from a culture that placed a man at the monetary helm on the basis of his promise (Jackson Hole, 2002) to run the printing presses if deflation came knocking.
Because M2 includes time deposits, which are generally locked up (in CDs and such) and therefore not immediately available for use, and it excludes institutional money funds (that might be used to buy things), it might not be the best indicator of money that can trot out of an account and create inflationary pressures.
For a better measure, I prefer MZM, or money of zero maturity, which includes institutional money funds and excludes time deposits. Here's a chart of MZM:
Yes, there was a little wobble downwards in MZM right after the end of the last recession, but over the past two years (red dotted lines), we note that a trillion dollars in new MZM has entered circulation (blue dotted lines). Again we might note that it took all of US history until 1982 to create the first trillion of MZM money stock, but only two years for the most recent trillion.
But what about people's preference for money? In Part II: Why Commodities Are the New Safe Haven, we delve into the big changes afoot there, as well, which will assuredly influence the future direction of commodity prices. For those looking to preserve the purchasing power of their wealth, it's important to understand the growing momentum in the global mindshift away from paper assets towards more tangible stores of value.
Click here to access Part II of this article (free executive summary; enrollment required for full access).
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I love the identical chart patterns that appear when QE was stopped molmentarily and the alogo-bots take over. The debt jubilee must continue, just not for the sheep.
As WTI rallies watch how Dec 11 rallies vs Dec 12 Brent is major backwardated. A lot of money is the wronf way on the z/z WTI and when DOE stats come out and we see another Cushing draw watch out. All this contributing to the rally in crude
Once YOU pay off your debt, YOU don't need FRNs. That is why YOU will never get bailed out or any relief.
Very good point. Although we still need FRN's to pay taxes (like perpetual, eternal property taxes if one "owns" their own home).
I figure around $3.5 trillion or so is being prepped for printing...get ready pensioners youre tagged for supporting Wall St now as food and fuel will be out of reach for all but the wealthiest.
Oh but theyve got a solution for that Im sure, just print yet more debt.
Or use the pensioners as food/fuel? Soylent Green?
youre not sticking with the no qe3 stance?
Right, no QE3 gift for stawkies. And remember, thats ALREADY been priced in!
Oh they may do some clandestine easing, but thats very boring and markets would still throw a tantrum.
Remember we're talking about QE3 being Ben walking up on stage Sept 21 and announcing free trillions jewbilee for Wall St. Just not going to happen.
I'm with ya Sheep! It will be the "other kind of fatigue" the "I am tired of waiting for (my) FED Money" Y'all and this why I am SELLLIIIINNNGGGGG:))))!
Then of course THEY will have to give THEM something and wahtever it is/will be, WILL BE enough for "my precious" to SKYROCKET, passed tne Moon on the way to Mars and so forth :)))!
It looks like the market is pricing in a monster QE3 from both the Fed and ECB. Whether they announce it or not, it's going to happen. The race to the bottom is on and I would not be short.
Let's see, we have record shorts on the S&P. Looks to me like Blackrock and a few hedge funds are burning shorts.
For the novice, it is called a short covering rally.
Last week I received a letter by my bank (BNPparibasFortis) here in Belgium that they would discontinue my account within 30 days and according to the terms there was no motivation needed. I only use the account for 2 things, namely:
- as petty cash for local spending (I keep a few thousand euro on it)
- for buying physical gold with the local branch office (this was possible with Fortis and it worked quite well).
Which of those 2 could be the reason? I did some research. Everyone within the Fortis organisation is very anxious to say anything about it but one thing is clear: it was an internal decision.
As I had a 30 day notice period I tried today to buy some € 5000 of gold. I was blocked for especially those transactions (was allowed to do normal payments). I filled an extra complain and I will continue my little investigation into this.
I guess someone doesn’t want their clients to swap paper for real money.
Nobody likes a winner.
OK so the inflationists seem to have won out the argument. Now can anyone give me any good reason why I shouldn't go to the bank, take out a loan and with 90% of it buy gold and silver and the other 10% buy tinned foods, toilet rolls, and other useful household items??
even if the best I can get is 7.5% or there abouts...???
Sounds like a plan to me.
Just make sure you can service the loan.
So, perhaps Chavez has gotten a hold of all of gold for sale at current prices?
Very interesting post. Obviously illegal, at least on a moral sense, but since when does the law stop these squids.
It was not illegal to close my account, but they had to allow me to keep buying physical via them upto the end of September. They didn't.
"Paper food" ETFs can help in an inflationary environment:
DBA (various food commodities)
JJG (grains)
CORN (corn only)
And of course it is easy to bet on inflation by buying (physical!) gold or the various oil derivatives.
Paper food derivatives could actually work!!!!
As long people don't ask for physical delivery....
Ha ha! Good one SD!
This Chris guy is really on top of his game. That is a bold call. Turns out that you can't print "stuff". Thanks for the anal cysts.
Bold calls are a dime-a-dozen. The dispersion on those bold calls is pretty stable though.
The correlation between commodities and equities is incredibly strong. Market drops, so do commodities. Just look at the price of oil.
Yes I look at the manipulated stocks and commodities.
The correlation between markets and TPTB total manipulation is quite strong.
Yes, it supports Martinson's view. Oil won't drop back to $35 again.
IS THIS AN ARTICLE DISCUSSING THE HARBINGERS OF OUR MASS EXTINCTION AS SPECIES?
No doubt. Parasites feast until the host is dead, even if it kills themselves in the process.
And everyone just stays complacent, maybe at most wondering why they dont feel so good or feel dizzy all the time, until they suddenly drop dead of terminal cancer that has infested us.
No one looks for a cure though.
"Our"???
I plan on being in the 1.5 billion left
Should be plenty of hot chicks around, as I don't think the ugly fat ones will last too long - they may even be killed off once society correctly starts viewing them as the useless eaters they are...
Not a mass extinction of our species, rather a reduction of about 90%, and that frankly, sounds rather refreshing to me....
Oops....double post...sorry
Glad to see someone like Grantham, agreeing with me, for a a change..............
THINGS ARE DIFFERENT THIS TIME.
The NEW PRADIGM is in pace............
These nutckaes saying it's the same, are FOS.
Krugman did an analysis for the rise in the price of gold in a deflationary environment.
You can use the same analysis for the commodity complex, which explains its bullishness, despite deflationary pressures.
http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/
Tell Krugman unless further debt printing comes in REAL low below FED doves expectations, gold is about to see $3,000 fast!
ManBernKrug
You, sir, receive an up arrow.
Who is a close friend of MerkSarkPIIGS.
I'm cereal!
Gold does not seem like the safest asset to park your wealth during a liquidity crisis, as PK explains. You'd want to be in cash.
Lol, if the liquidity crisis is due to the velocity of money exceeding the ability of the system to cope with it then the value of that cash is evaporating.
Keep some cash for emergencies, gold for wealth preservation.
That's not the scenario ManBernKrug is talking about in his blog.
I'll go read Tom Biscardi's blog before Krugman's
I'm real super cereal about finding TimKrugBarr.
“a few noted deflationists who are calling for a top in commodity prices here.”
HOLY MOTHER OF GOD !! ARE THEY KIDDING ?? The Swiss Franc has joined the bonfire of the fiat paper currencies. I laughed so hard reading that some guys are calling a top I almost did myself an injury.
This end of the world view is a bit depressing. You just need to get back to sound money and sound ethics and unleash the entrepreneurs and free markets. If in 1960s there could be a man on the moon, food shortages and supply issues can be solved through technology no doubt. You just need higher prices and non crony capitalists in charge
Right, thats all that needs to happen....simply roll it all back to 1960's, remove about $100 trillion from the system, reinstate sound money and sound ethics, incarcerate all world banksters and politicians....seems easy enough OK lets get started!
No but my point is there is nothing Earth related as in " Earth can only feed X " . There have been several Agricultural revolutions and technology has gone a long way since the 1960s. So it is possible.. but capital must be reallocated from the boondoggle projects from the politicians and the bankers must be dealt with (just letting the market do it would work fine).
I agree, if the whole world changed and we could get rid of the monolithic force of evil that rules the world that JFK spoke of a few weeks before they killed him, we'd be much better.
Quite right, Zola. We just need to get rid of the mega-parasite called "state."
So if I said that the earth could support 500 billion people you would not call bullshit? Where is the threshold?
Well maybe not earth itself but i would refer to the Kardashev scale to answer that question.
Ah yes, the cornucopian view! What we need is galactic-scale energy!
http://www.theoildrum.com/node/8155
http://www.theoildrum.com/node/8185
Once your child grows to 5'6", you would be a fool to expect him/her to continue to sleep in a basinet -- time to leave this Earthly cradle, there's a lot of room up there in space...
LOL....ROTHFLMAO.....LULZ
Oh...poor Zola.....you made my day.
Have not laugh that hard in days.
Obviously you believe in Asimov's dictum that any sufficiently advance technology is akin to magic.
You obviously engage in magical thinking.
Yes there have been major advances in technology, not the least of which in the ag sciences. Which did stave off the doomster's prediction of global starvation in the 70's.
But the ramp up has come and gone. There is less arable land now. There are more people to feed. And the technology to squeeze even more from less is now less efficacious.
Besides....it took a HELLAVA lot of cheap fertilizer to get that AG-Tech Revolution which comes from fossil fuel. It also took a lot of vehicles and ships to efficiently ship all that new found food. Which also runs on fossil fuel.
We have reached Peak Cheap Fuel.
Bye Bye Popular Science dreams of Utopia and a Global Horn of Plenty.
Besides.....free markets can only exist as they should if the people operating the markets are free from corruption or the effects of corruption.
Name me a time or a market where that happened for any length of time that matter.
(Chuckle) :)
I do disagree with your pessimistic outlook. These arguments have been made again and again in the past yet proven wrong.
Nobody could envision the technological leap in the last 100 years. Prediciting the future is very difficult but in any case, as you mentioned , energy source is critical. The big phase shifts coincide with a new energy medium, from wood to coal to oil.
Now i dont know if we will ever exceed oil. You say no, i say it is possible. The future will tell.
Now i dont know if we will ever exceed oil. You say no, i say it is possible. The future will tell.
True.
However, history does show that as we transitioned from one fuel source to the next, not only was the fuel more abundant, but had a higher energy level as well. Oil in particular is special as it has the highest capability of deriving other fuel products than any other fuel source known to man, not to mention non-fuel products, such as plastics.
Now....who has discovered...much less is exploring....this even cheaper, more abundant, higher energy content source of energy? The very people in geology and the oil and energy industry certainly can't find it because after 150 years of searching, armed now with the latest and greatest in technology....there is none to be found.
However, even the oil execs have gone on record stating that the era of cheap oil is over. The rush for shale oil and shale gas is evidence of desperation, not just of technological prowess. Look at how much oil we get from Canada.....that has to be derived from tar locked up in sand. Yummy.
I'm glad we have that technology....don't get me wrong. But it is a stop gap measure on the way to decline.
If you want utopia to continue with cheap abundant energy for all and an all electirc world 24/7, the governments of the world will have to right now....this very instant.....invest 10's of trillions of dollars in nuclear power plants all over the world with investment in personal nuke stations the size of water heaters for poorer countries without the transmission lines and also for the wealthy countries overhaul and reinvent the transmission lines they already have to be able to handle the load.
Otherwise....we are going to continue on our slow....sometimes violently quick....collapse to equilibrium.
As i said above this would be money much better spent than bailing out failed banks...(and not by the government but by the market-cf fake renewable technologies going bankrupt daily).
The oil price signal will force it a some point, it may take 500 USD oil for people to wake to the need to seriously invest (especially the big oil companies).
The oil price signal will force it a some point, it may take 500 USD oil for people to wake to the need to seriously invest (especially the big oil companies).
Really?
Seriously....what economy that has ever existed in history if brought forward to this day, much less, any that exist in the here and now, could survive $500/bl of oil.
We couldn't take $147. Every single month that oil is above $70-75 a barrel creates a material impact on the economy. Slight....but when it takes only a few shocks to the system to create systemic risk of collapse you can not afford any slight material effect at all.
You still reside in the land of theory. All theories work great on paper. None survive intact the weight of reality. Which is why science always tears down and rebuilds theories in the light of newly discovered information and discoveries.
Which you should do now.
Oh....and your quip about fake renewables....agree to some extent...in terms of government intervention and their ability to produce baseline power (that power which is available to everyone 24/7).
But you know where that investment needs to go.
Batteries. Storage.
Find a way to increase storage by 1000 fold and decrease the cost per battery by 75-90 %
and renewables will take off.
But how long have we've been tinkiering with batteries? 1000 years since the Parthian battery. Since 1800 in any serious fashion.
How long have we tinkered with chemistry? Thousands of years.
The oil companies are at the vanguard of both chemistry and data aquisition. The data tells them there is no magic fuel source which will replace and exceed oil in terms of thermodynamics and profitable products derived from it. They also have enough knowledge in chemistry to know that some paradigm shifting technology is not in the wings that will magically give us uber-batteries anytime soon....at least soon enough to matter.
If they did...they are sitting on record profits from year after year to invest with. They have the money. The profit potential from having the patents on these new discoveries would be enormous. But they are not investing any more simply because they understand that even if they did invest those billiions today, you can only do so much with chemistry and thermodynamics and thus it would be a misallocation of funds.
Better to hang on to that cash to show a better balance sheet to the investors and Wall Street. Becasue they sure are not making any more money due to discoveries, either of oil or chemical processes to make better batteries.
They are simply making more money because the price of the dwindling cheap oil supplies is going up. As it naturally should.
Give or take a little market manipulation and fiat currency debasement.
The interesting thing is when you price oil in gold , if you assume that gold reflects the monetary aspect (debasement) , i could make the case that in "real terms" oil is not reflecting scarcity yet (or maybe gold is grossly overvalued but i dont think so). Also there are like you mentioned real demand considerations coming in play due to demand destruction and weak economy from a high oil price. But the major oil companies know this and are also aware that know reserves of oil are decreasing. So it is kind of tug of war between a high oil price encouraging search for alternatives and tipping the world back in recession and then falling again...
If you look at R&D budgets devoted specifically to alternatives, it would still be a small portion of the capex of such a company. Also the comment about storage is correct but you also have to take care of energy generation first. And unless you want to go nuclear for baseline (risky after fukushima) , a lot of R&D must be invested in that area (there are a couple of ideas out there but this is beyond the scope of this discussion).
Excellent exposition. Articulate. Agreeable.
I am also pessimistic; one either has the bittersweet pleasure of being right or the relief of being wrong. So far, it's worked for me.
I'm not sure whether the next paradigm shift will be in the economy, quickly followed by the government. Or vice versa. (I don't mean the Dems going out and the Reps. coming back in.)
Whichever, it's going to be tough.
Oh.....and concerning my "pessimistic outlook"
Nothing wrong with pessimism.
It's simply the stage between moving from naive, ill-infomed optimism to accepted realism.
Good luck with that.
Yes, the right thing is illegal.
Not illegal, just against rules/regulations (AND competitive!)
It is important to remember that china/asia is the driver of commodity prices worldwide. As China lets the yuan appreciate they will more easily afford the basics and the price in dollars will rise. This MUST be a long term event. They must give their citizens more buying power and allow their currency to float. Ag has remained strong. LC @ 117. etc...
http://ghickeyblog.blogspot.com
gh
AH I see Robotrader has descended onto this thread, I can tell because each of my posts get voted down before his post....in 5.....4.....3.....
Air, Water, Food and some manner of shelter.
none printable. All in short supply, at least good forms thereof.
Simpler life, organic food, self-grown if possible, clean surroundings.... let the fools fight for paper scraps.
V
Population Control Vectors
Chris misses the point about prices...commodities are generally priced at the margin in the futures market. These markets are still time bound and as a result, all that needs to happen is for SHORT TERM imbalances between supply and demand, or perceived imbalances between supply and demand, to dramatically affect the prices for commodities. Any idiot with a blog can tell that long term supply and demand imbalances exist in commodities, but to extrapolate that into short term futures pricing is idiotic.
Currency debasement plus a developing third world assure the long term commodities trend is up. A few short term drops in price mean nothing
In this view, three things have to be true:
This is your premise? Look, I don't disagree that commodities will rise again at some point, but if these three things are your premise, then:
#1 fails to account for the serial misallocation out of China. As they stock pile more commodities they do not need, this creates a skew in demand. It is my opinion that, in the land of bubbles, China is now king...and that story will not end softly. As such, I suspect real demand will ultimately emerge as much softer.
#2 Fails to account for very bearish signals out of credit land. It is almost certain that credit is about to dry up. Those signals are quite clear, influenced by the desperate situation out of Europe and the compelling case for recession [and actually depression] in the US. A complete failure of banks in the US to lend is pretty strong evidence that credit is not available.
#3 When you say people, do you mean the starving citizenry? Because if you do mean those people, then I assure you they prefer money. They prefer it so much that they are liquidatiing their assets to buy food to eat...which I guess you could call "things." But since there are a lot of categories for things, I doubt the race for things beyond food to eat is necessarily going to "rocket" as the economy in which people actually live is contracting.
As for the FED buying "things"...I think that is a vastly overestimated possiblity, and already priced in [in a flash] to markets via the usual criminal syndicate Wall Street front runners.
It could be that I am missing something regarding the premise of your argument...as I ran out of a very important "thing" today...namely, coffee. So my two cents are kicked in with this caveat.
Starved to death people dont demand much.
Nothing is really going to 'rocket' from here, now its just a battle to keep things as stable as possible until they pull the rug out.
These 'analysis' of things today crack me up, applying 'supply/demand' textbook Econ 101 to whats supporting everything, simply printing trillions out of thin air.
Its all ridiculous.
Cdad, I could not agree more.
While this technical analysis may be correct for the here and now and the short term...as all prospectus say...."past results do not indicate future performance".
The one thing I learned while obtaining my masters degree in meteorology and afterwards as a practicing meterologist is that after looking at all the data and forecast models...it sometimes was good just to get out and observe what was actually going on.
Sometimes they told quite different stories.
credit has to be paid back at some point, right?
This is not true since the start of "reaganomics" in 70-ies where we had a fundamental shift in paradigm - the borrower does not have to return the credit's capital amount itself but constantly gets refinanced and only has to keep paying the interest
Buy commodities, kids. Anything but, g**d.
..too much thinking for me, otherwise good article. I like what Sprott says, it's so much simpler, and we all know about occam's razor, "just own precious metals and nothing else." Good advice, albeit slightly strange from an asset management company that also runs mutual funds, etc. What's that tell ya?
It tells you Sprott has been around a long time. He has long and short funds and his clients demand stock exposure so he gives it to them. This gold rally is only 10 years old. He's been on Bay Street a great deal longer through other bull runs and shorted the shit out of 2007-2009.
The stock market could easily spike 3000 Dow points and commodities spike up parabolic if the Fed announces unlimited QE (QE-3, QE-4, QE-5, QE-infinity) until the unemployment rate drops to "7 percent or 7.5 percent".
Fed’s Evans Calls for Stimulus to Cut Unemployment to 7.5 Percent
http://www.bloomberg.com/news/2011-09-07/fed-s-evans-calls-for-economic-...
Well we will know for sure in a few days. I sense a big disappointment...from here on out what we get is behind-the-curtain 'programs' and boring hand holding of bonds rates and such.
Bernanke will not disappoint.
“0” employment number was a green light (and political cover) for Bernanke to make a “shock and awe” announcement. They (the Fed) are lowering expectations (pretending to have a “divided” Fed) intentionally to have a big impact ("shock and awe") from the “unexpected” announcement.
Whatever the fed does will be big. The ECB is also getting into the printing game.
The fed can print all it wants, but it cannot control unemployment rates. That printing will jack up commodities and especially energy prices. The US economy runs on oil. Energy is required to transport labor and goods. That extra $300/mo that goes into the gas tank due to fed printing can no longer be spent on other parts of the economy. Layoffs begin and the fed is back to square one.
I would bet a significant amount of money (indeed I am) that ex-gold, commodities will be lower 1 year hence and 5 years hence, than today.
Broke people cant pay higher prices.
SheepDog-One
Broke people cant pay higher prices.
************
Exactly and who other than us peasants "consume"
No prices can hang above the market clearing level for long-at some point prices must come back to affordability-
M2-exploding-
BASE has also gone parabolic-
MZM is already existing money that sits in MZM as money equivalents and has zero bearing on money or credit supply-
Here's where you look to see if any of that movement is actually Inflationary-
http://research.stlouisfed.org/fred2/series/M2V?cid=32242
http://research.stlouisfed.org/fred2/series/M1V?cid=32242
http://research.stlouisfed.org/fred2/series/MZMV?cid=32242
The US is broke, but how about the rest of the world? The PIIGS can declare bankruptcy and the ECB will make up the losses for the banks. They will simply inflate away to buy the bad debt just like the fed did over here. The fed printed trillions. Why can't the EBC print $300 billion to cover the PIIGS? The can will be kicked down the road for years or even decades. I don't like it, but that's reality. The bankers will be saved and we will all be taxed through higher prices.
The US is broke, but how about the rest of the world? The PIIGS can declare bankruptcy and the ECB will make up the losses for the banks. They will simply inflate away to buy the bad debt just like the fed did over here. The fed printed trillions. Why can't the EBC print $300 billion to cover the PIIGS? The can will be kicked down the road for years or even decades. I don't like it, but that's reality. The bankers will be saved and we will all be taxed through higher prices.
**********
Yes-the rest of the world is broke-otherwise we would be the only ones in trouble-no?
Sure-everyone can print at least untill the Bond markets puke-but tell me-
How does all that money get into our sweaty little hands to buy things with?
Do you think they'll just give it to us?
Think again-
Resistance is futile. Escape is the only play. Please educate us on the means of escape. In other words, how can the small time trader ride the coming paradigm shift and generate enough capital to reach escape velocity? Oil stays high but is volatile, commoddity prices like ag, oil, pm stay high and climb. Amerika's military is outsourced to global interests that are prepared for the decline of the west and the rise of the east. Fine, it will happen, but I want out. Awareness is breeding panic instead of a clear mind through the storm. Who amoung us are the beacons? How did the phrase " bought the farm" become synonymous with death? I want to buy a farm so I don't die.
The destruction will last a generation or two. I find it troubling that many references cite (sorry for lack of actual citation) 1974 as the beginning of the charade. This is the year I was born which leads me to the conclusion that for my entire life I have been led to believe a lie. The blanket of deception is getting thicker and suffocating more and more. So few can even see it. I cannot save the world, ie, i beleive resistance is futile, but knowing of the deception can I even save my family? We all need help.
"Resistance" is NOT futile. We are the resistance!
Really?
Pray tell what kind of resistance would be effective in the long run?
America was supposed to be the "Novus Ordo Seclorum"
How can there ever be a New Order....a "more perfect union" when any social, politcal and cultural construct is operated by and for corruptable humankind?
The Terminator franchise are only movies my friend.
You are quite perceptive and I believe correct, j.darkness.
I was born in '64. I remember the first paradigm shift when my father pushed his car to the gas station on a Thursday in the early 70's because that was the day according to his car tag he could get gas. I was too young to know that what was really happening was that America was in a state of collapse due to imperial overreach, domestic Peak Oil production predicted 20 years earlier by Hubbert, and Nixon realizing America was going to default unless the dollar was depegged from gold.
After that along came Reagan to issue in the credit/debt fiat based boom (delusion/illusion) which was supported by both Democrats and Republicans to this very day.
You are most sadly correct to say that for your entire life you have been led to believe a lie.
Welcome home from the Matrix. Don't worry if you feel like throwing up like Neo. I have felt queasy for the last 4 years.
We all do indeed need help. Can you save your family? That is unknowable my friend. But that really is the only thing worth saving anymore.
Go with God.
Yes, nausea indeed. Via con Dios may be the only way to go. But there is a hotbed of lies and deceipt going on there as well. My 5 year old started kindergarten today. Another hotbed of lies and deceipt. Its a rainy and depressing day in more ways than one. So with the impending inevitable *event* 3-4 trillion of thin air money hit the stream, surely there is a strategy to turn $1000 into 10,000? Any suggestions?
Agreed with the hotbed of lies and deceipt concerning the Via con Dios. As a once Southern Baptist now practicing Anglican, I like the way Anglicanism straddles the line between emotion/experience and reason.
That said, I still make up my own mind. Most of the dogmas I hold are mine. If somebody else differs, fine. Let's discuss over dinner and a beer and part ways as friends.
Congrats to you and your 5 year old. Your child is lucky to have you awake and aware now in order to combat the crap they will feed him. My wife and I (mostly my wife....I'm there for the longer, philisophical discussions) homeschool our 5 kids. Not out of ideology....mostly financial. When you refuse the free option of public miseducation you are left little choice which is affordable. BTW....except for 1 child who is mostly at his grade level with the exception of math....all the rest test anyhwere from a grade higher to the extreme of my 13 year old who tests at general knowledge at the level of freshman in college and my 11 year old tests out at near college level math.
They certainly did not get the math gene from me.
Which is why I'll give you no advice on how to turn $1,000 into $10,000.
Other than this nugget from my now deceased father.
"Never loan or invest any money you wish to ever see again."
Via con Dios.
Check out this thread at TF Metals about Silvercorp Metals (SVM): http://www.tfmetalsreport.com/forum/silvercorp-metals-inc-svm-aggressive...
And this from Bloomberg today: http://www.bloomberg.com/news/2011-09-07/silvercorp-says-canadian-police...
I am long SVM.
Fine, Ill bite: out of the money calls on AGQ
@ Matt and LV - Thank you for the advice, it is much appreciated. I will let you know the results.
This is going to be an inflationary catastrophe!
Um um. If the credit is your "money" and your currency is in dollars, and the same amount of dollars back less credit than before, then would the value of your dollars go up or down?
If we do see another leg up (wave 5), then the shit that it will cause around the world politically will be something to behold. Like the sheepdog says, "broke people can't pay higher prices".
Long rebellions and chaos.
Might be nice to ride wave 5 for a while, but I'll be shorting it once it matures (if it plays out in the first place).
These charts mean nothing. If just one counterparty to the $1,500,000,000,000,000.00 in derivatives worldwide defaults a deflationary spiral will ensue. (Think LTCM X 100) Other than that, it would seem "high" inflation, not "hyper"inflation, will continue in our future.
http://lonerangersilver.wordpress.com/2011/08/30/pyramid-of-capital-syst...
BUT, BUT, BUT while the M1 and M2 basically tripled from 1979 to 2000, and the MZM more than quadrupled, Gold lost more than 65% of its value.
Extrapolate all you like based on the past, but keep in mind that there are past examples that can also be used to extrapolate $700 Gold.
Check out this chart and then try and tell me that gold is not in a parabolic blow-off.
http://www.mrci.com/pdf/gc.pdf
You're saying that people are going to sell their gold and buy Netflix shares? I'm pretty sure that'd create a Tax Event.
Now that's the kind of extrapolation I'm cautioning against. LOL
Keep your chart on hand and look at it 5 years from now. Self similarity prevents you from knowing where we might be now w.r.t. how this will develop. (exponentials look similar at different scalings)
Sure it looks overblown based on the past, but even inflation adjustment provides a little perspective. The world is sooooo different than 30 years ago. The surreality of the present should clue you that basing the future on the past is unlikely to be a winning strategy.
This time is different.
Where have we heard that before?
Fortunately, every "time" is a bit different. Otherwise, we'd all be bored to death.
Post another note a year from now with an updated chart. If you are right, you can enjoy a good "I told you so". And regale us with your riches from going short gold.
Somehow, I doubt we'll hear from you, unless it is in full denial mode.
It's only to be expected, Tao --- what would ZeroHedge be without its anti-gold trolls?
At least they have diminished in number and virulence as of late --- thank God for small favors.
And the US dollar, and Western governmental debt, are not?
Please blow me, parabolically.
PS: Please also tell your daddy Jon Nadless that Akak from ZH says "Hello".
If he has forgotten who I am, just remind him that I am the person who demolished his multiple disingenuous and dishonest arguments in support of fiat currency, and against the holding of any significant quantity of gold during a time of monetary collapse (which you however are apparently still trying to trot out) in a series of email exchanges a couple of years ago ---- you know, around the time when he was shrieking that $1000 gold was in "a bubble", and imminently about to fall back to $400.
Sorry I don't know him. ;-(
But by the looks of your argumentative abilities, I'm sure you're right about him having forgotten you.
Blah blah blah blah.
Go back to watching CNBS and sitting in your beloved US Treasuries, or APPL, or in whatever form of paper fantasies you have decided to park your remaining wealth, as it continues to bleed and the prices of gold and silver continue to rise as our monetary system implodes. He who laughs last, laughs best --- and I WILL be laughing at you, and at all the other sheep who placed their misguided trust in our sociopathic masters, when the financial and monetary status-quo comes crashing down around your ears. "Who couldda known?!", you and your kind will be wailing, as your terminal center-thinking today dooms you to penury tomorrow.
Oh, and since you want to play battle of the exponential charts, here's another one for you, which you conveniently do NOT address in your gold-bubble fearmongering:
http://blogs.fxstreet.com/forexhedge/files/2011/01/usdebt.gif
Full disclosure: I am permanently long PMs. In order for us to understand why gold did NOT rise with all the inflation post- Reagan to about 1999, we have to do some simple analysis. The biggest difference BETWEEN NOW AND THEN is that YOU GOT PAID REAL INTEREST if you parked your CA$H in the bank. Got it????? I know...I WAS THERE. In other words, MAKE MONEY CHEAP, AND YOU GET CHEAP MONEY. Courtesy of Uncles Al and Ben. Also, anyone besides me remember when the word "fiat" did not mean currency, but an Italian PIECE OF SHIT car?? Now when you hear the term "fiat", what comes to mind? The jig is up. Gold is here to stay and will be increasingly sought from now on. Thanks to the internet, we have all learned what we should have FUCKING LEARNED IN SCHOOL. But instead we were taught bullshit, like to send our money to Wall Street COCKSUCKERS. You want gold to crash? Real simple formula: raise interest rates to real inflation plus 2%. Then you will have your crash. But we know that the economy will crash harder if that happens. SO there you have it. And you don't even need an economics PhD to understand......You're welcome.
I still do not believe that interest rates, positive OR negative, are the largest influence on the price of gold, not by a long shot. If one does believe that, then please explain why gold rose relentlessly from 2004 to 2006, even as the Fed Funds rate rose from 1.0% to 5.25%? Oh, and that was entirely BEFORE the financial crisis, too.
Gold did not rise in the 1980s and 1990s simply because we were not then facing the imminent collapse of the worldwide financial and monetary systems, as we are today.
Gold is not in a parabolic blow-off! Since the inception of the privately-owned Federal Reserve the Federal Reserve Note has lost 1 percentage point in value per year since then. I "think" that is a trend!? In real terms gold should be about $2500 per ounce right now to match 1980 prices. The game has just started. If you are "short" you will lose your "shorts"!:)
Turn your graph upside down and pity the poor old dollar.
An ounce of gold will buy you a good suit no matter how many dollars you trade it in for.
LV RE Plunges further:
<<Golf courses nationwide have suffered since the recession, and for the fifth straight year, more closed than opened in 2010. But all three of the Lake Las Vegas golf courses went into foreclosure, and only the Golf Club at South Shore is back in operation -- no longer as a private club, but as one open to anyone willing to pay a $600 annual fee. Initiation fees dropped from $175,000 to, um, zero dollars. The development's casino, Casino MonteLago, closed in March of 2010, and the Ritz-Carlton Lake Las Vegas shut down two months later. The lake isn't going anywhere, and the triple-digit temperatures are also there to stay. >>
http://money.msn.com/retirement-plan/the-5-worst-places-to-retire-in-the...
Buy commodities....Be Happy!
interesting trading day, from over sold, to over bought in one day, and ramp all day usually means europe sell off over night. seen this happen before.
Over and over again there is 'inflation' but ...
When that gas gets over $4 per gallon (US) the bottom drops out of demand and markets contract ...
over and over again there is the 'deflation' taking place in the real world, right under everyone's nose. High gas prices make the 'other goods' prohibitively expensive with accompanying bankruptcies of 'other goods' providers.
The people can afford the gas but cannot afford the new car ... or the new highway or the office complex, or the Las Vegas. Money for gas comes from spending for something else, money for gasoline is flowing to Saudi Arabia and Nigeria, out of America and the Eurozone and China. All of this flowing with ABSOLUTELY NOTHING to show for it except for stupid 'wealth'.
Bernanke 'prints money' and gas/crude prices rise: QE2 began with crude prices @ $70 per barrel, not $115. There is no room for money supply increase, it's self- limiting.
This thesis is fundamentally flawed because deflationists (like MISH) acknowledge that prices of some things can increase even during deflation. In this case, commodities prices can increase during deflation, while prices of other things (houses, education, bonds, equities) decreases.
Headline and article is written by one who sits at a slot machine ready to throw down the coin and pull the one armed bandit.
Commodities are like the Ocean. Tides come and go with the occasional wave. As long you are ready for the waves on high ground and no debt or leverage/margin you will do fine.