(Still) Waiting for the Crash in Commodities
Posted by Prof. Goose on May 17, 2006 - 12:07am
Waiting for the Crash in Commodities:
The bull market in commodities, now in its fifth year, is beginning to challenge the laws of physics. Prices as measured by the Reuters/Jefferies CRB Index have not staged a rally this long in more than 50 years.As someone said elsewhere, "the inability of economists to grasp the finite nature of non-renewable commodities never ceases to amaze me." Discuss.
“Considering the many productive uses of petroleum, burning it for fuel is like burning a Picasso for heat.”
—Big Oil Executive
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
But no, apparently the lines on a chart have mass and are drawn toward its base by the curvature of space-time.
Who knew?
"We live in crazy days," said Juan Eduardo Herrera, vice-president of strategy at Codelco, the world's biggest copper producer. "These prices are not here to stay and nowadays they are causing more harm than good to everybody."
When the major real market (i.e. the physical metal) people say things like that it behooves everyone to pay attention.
yeah, right. just take your mediacation and everthing will be just fine.
and thanks to this apparent "bubble" in commodity prices, the recent pull-back in crude prices found an intraday floor of $68.51 before moving back above $70 again.
stronger US dollar???
correction of all corrections???
i'm sure this would be an outcome that many with vested interests would love to see, but this is surely only possible if the US economy completely melts down.
There is no Law of Bull Markets in Physics as far as I know.
>O.K., let's try real hard to find the cause of this commodities boom, could it be, oh let's see....trying to bring almost two billion people from an animal/people powered society into the modern era in a decade time span? (China/India)....could it be that we came off a commodities collapse in the 1980's early 1990's, so that gold is still cheaper in adjusted inflation terms than it was in the 1970's? Could it be that investors who have gotten their clock cleaned on successive bubbles from the S&L crash (housing collapse? I remember the 1980's....I laugh at housing collapses....HA, HA, HA,:-O), to the internet "tech bubble" crash, to the Euro bubble, to....yep, you got it...someone told them to go "with the hard assets, the metals, the oils, we will always need those (true enough, but when the value of money exchanged on these items begins to wildly exceed the world value of these items, something is getting ready to happen....but, money has to go somewhere, and where to put it? You try to choose, and remember, historically it's not been such a great idea to buy items at historic highs (oil, gas, commodities are getting closer to the all time top)
Let's admit it, the commodities bubble is just that, a bubble, and it shows signs of collapsing even bigger and sooner than the housing bubble...only two wild card holds them this high and that is China/India. Most stats show that if you take these two out, the efficiency of production/use/recycling of commodities has improved in the developed world, and demand has not really risen appreciably. Energy consumption in the U.S. for example has went down, not up, as a percent of GDP...
Which brings us to this dollar thing....I am going to go out on a limb here and say the dollar is not that bad of a bet.
I know, I know, all bets are that a MASSIVE currency collapse is coming, that we will have panic in the street as even hookers and Starbucks will turn down dollars (my creditors are still accepting them, however), and the dollar will fall to nothing compared to.....(???), and there's the rub....compared to what?
Ohhh, that's right, the mighty Euro, the currency of a..."group" (??) of nations several of whom have recently renounced it's own charter....founded by a nation whom, along with it's biggest most powerful neighbor and fellow member run constantly out of complience with all the groups own memoranda of understanding on budget deficits, currency valuation, work rules and interest rates...a group with an aging demographic that is sure to be a greater burden on it's social system than even the U.S. Social Security system faces...and that is, as a percentage of GNP, a bigger importer of oil and gas than the U.S., and with it's only "internal" oil and gas supply dropping like a stone, and with a Muslim minority far greater than that of the U.S., and far more militant and directly connected to the "struggles" for Islamic and Arabic "liberation" than that in the United States.....THE EURO???? !!!!!!
BUT THE CHINESE!! They are coming after us, don't ya' know....of course, they have their own energy woes, and not only that, are driven by exports to....well, mostly us, despite attempts to diversify, because the EU does not fancy being buried in cheap Chinese plastic items after all....and the above mentioned rise in commodity prices mean those cheap plastic items are not so cheap after all....
As I sit typing this, I have the local news on TV, here in central Kentucky....where Toyota is announcing expansion of it's large modern plant in Georgetown KY to build the Camry Hybrid, where Honda is looking at Southern Indiana or Ohio to expand Civic production, and where UPS is expanding before even it's last expansion is finished to cope with increasing air freight to and from the aforementioned China. Now one assumes that Honda and Toyota, selling cars in the U.S., and China, selling everything from Christmas cards to auto and truck brakes in the U.S., fully intend to take payment in....dollars, maybe?
I look at the stock charts....I should have bought oil and gas stocks, right?
Well, only if I ignore Cummins Engine, Caterpiller, and Deere&Co, who have went anywhere from double to triple in the last 3 to 5 years, BEFORE you count dividend reinvestment....who'd a thunk it?
One more thing....try to avoid the phrase "peak everything". It is a clear violation of the terms of true "Peak" and simply makes no sense (peak aluminum? It's recycleable material, and is still cheap enough that you don't even see the homeless and poor out walking the highway to pick up cans...peak iron or steel? Demand is high yes, but Australia alone has enough to provide for a century, they just don't have enough manpower to get it out fast enough...."peak everything" makes those concerned about the real issue of peak oil or "oil and gas depletion" sound silly by association, and borders on "Chicken Little syndrome".
Folks, the depletion of oil and gas are real issues, and deserving of hard, HARD work on replanning our energy system, conservation, and applied engineering. We may need to work on getting a grip here and trying to stay a bit more on topic.
Roger Conner known to you as ThatsItImout
<Funny how you choose the only two commodities, iron and aluminium, that are still in very good supply to make your point.>
Right, as opposed to say Gold, Silver or Platinum, which of course are in short supply because no one bothers to recycle them but just throws them in the landfill...
I grew up on the poor side of the tracks where in the old days of copper plumbing, you were careful who you rented to or they would tear that out of the house and sell it for scrap....
Roger Conner known to you as ThatsItImout
You are spot on. Call a spade a spade and let the masses froth at the mouth. When prices depart vertically from facts it's time to piss against the wind. You will get wet for a while, no doubt, but soon it will be the crowd that will look for umbrellas.
Oil Fact (just one): The daily volume of oil and oil product futures traded in NYMEX and ICE (ex-IPE) alone, currently exceeds global daily oil exports by a factor of 10-to-1. When you add the spot market and the OTC derivatives the ratio gets much bigger. Last year it was 5-to-1; I don't know where the ratio was at the bottom of 1998, but I would guess alot lower. We are getting drowned in paper oil.
The game can be played from the other direction as well, of course; and it has been - oh boy has it ever...
There will be no suden rush to close position due to the finite nature of oil. I think most people here would agree that there will be no price collapse sans some unforseen catastrophic event that produces more oil.
Sincerely,
Hellasious
There is a comment further below about all the futures contracts being used for hedging and therefore their current huge volume is immaterial. That is false for two reasons:
- Hedging involves the transfer of risk: futures trading is a zero sum game. If you win, I lose. So, if you are a producer and sell 1.000 oil contracts short to hedge from its price going down someone else has to assume that risk. That someone is called a speculator. A market needs both, otherwise it cannot function. There are plenty of speculators in this market. How many?
- Assume that every single barrel of oil that was produced and exported in the world was hedged daily. That's some 50 million barrels, or 50.000 contracts in the futures market(1.000 barrels each). The current daily volume in NYMEX and ICE in futures alone is abt. 700.000 contracts (including gasoline, htg oil, etc). Adjust for Sat. and Sun. and it comes to 500.000/day. That is extremely excessive vs. every conceivable hedging requirement and a good measure of just how rampant speculation is in this market, right now. And that is before we take into account the regular OTC spot oil market, listed options and other OTC derivatives. This market is hot and frothy that we should call it..cappuccino.
There are a heck of alot more dots to connect to show the full picture, but I have already taken up way too much space, for which I hope you forgive me.I agree that speculation is certainly influencing the current market. I am just not convinced that it is either hugely significant or necessarily a bad thing.
Can you provide some simple historical data so that one might compare the current level to the year 2000? 1995?
Rampant speculation is extremely significant in shaping prices (just remember dotcoms) and as to good or bad, it depends. Extremes such as these are never "good", in that it is never a good idea to let the tail wag the dog. Or allow Enron (and several Wall Street prop desks) to set prices for electricity in CA - if I may draw an extremely timely parallel.
IMO we often forget that PO is an event measured with decades; in the meantime there is enough room for many boom & bust cycles.
Volume traded on a daily basis vs. the "real" stuff is a very good (actually the best) indicator of how much speculation vs. actual physical trade is going on. Of course each contract changes hands dozens of times, that is the nature of speculation. Just compare futures volume/physical oil in 1998 at the bottom of oil prices, to today's ratio. It is easily triple to quadruple. Speculation attracts more speculation until the whole bubble pops. Commodities are also very prone to rabid speculation and violent price moves because of leverage: margin is very, very low, typically 3-5% and sometimes alot less, if you double leverage as many hedge funds do. Just remember the mess those Nobel laureates and their bond hedge fund got into a few years back..the Fed had to bail them out. There will be no Fed bailout for commodities' speculators - of that you can be certain.
Someone further up used the total daily oil production in the ratio (84 mbpd) - that is ok if you are just comparing ratios over time, but not for just once. Exported oil volume is a much better figure to use to gauge hedging needs: eg Iran produces ca.4 mbpd but exports 2.5. The rest it uses locally, selling at prices way below market and does not need to hedge. Same goes for almost all other producers, except the US, UK, Norway and a few more.
We need to distinguish the issues of peak oil (reaching an immutable ceiling in our capacity to produce oil) and the behaviour of commodity indexes in general.
There seems no clear reason why we cannot be both at the front end of the peak oil plateau and in the midst of a speculative commodity bubble.
The China/India story has driven a general surge in commodity (energy, copper, steel, zinc &c) prices. You don't need to posit peak oil to explain that. I know several traders that think peak oil is tosh but who have made very signficant portfolio gains by buying all things physical over the last 2 - 3 years.
For an interesting take on the industry see about half way down.
And for effective recyling of those cans and bottles you should have a deposit system.
Of course its hard to recycle the platinum spewed out on the side of the road from dying catalytic converters.
http://hyperphysics.phy-astr.gsu.edu/hbase/tables/elabund.html
We won't "run out" of Aluminum or Iron anytime soon, but we may not be able to produce it due to insufficient energy and lack of the other raw materials to do so. But even if we run out of Aluminum on earth, we'll just start mining Al on the moon ;)
But then again, we can also consider oil to have a logistical peak also. Afterall we'll have a little over a trillion barrels left when we peak and one could in theory produce 50 billion barrels a year, but that will never happen bc/ of the energy/ raw material/ engineering/ infrastructure requirements.
The ejecta regolith is just the "crumbs" on the surface of the cake.
http://lunar.arc.nasa.gov/printerready/science/geologys.html
http://www.1point1c.org/astro/moongeo.jsp
I think gold will once again become the world reserve currency, and these financial pirates playing their games with dollar inflation will be in the dustbin of history.
For an interesting take on the industry see about half way down.
And for effective recyling of those cans and bottles you should have a deposit system.
Of course its hard to recycle the platinum spewed out on the side of the road from dying catalytic converters.
And you seem to have bought into a lot of wingnut nonsense about Muslims in Europe.
Your energy consumption going down as a % of GDP is most likely off. GDP has been manipulated by the executive branch for the last 30 years and if we go back and use the unchanged, original formulas I propose that energy consumption has not decreased. Please also see Jevons paradox dealing within increasing energy efficiency and it total effect.
You're right about other countries still accepting our currency. We are an integrated world exchange now, so we will pull almost all down with us and all your points make that clear.
Lastly all those heavy equipment manufacturers have been pulled into the massive development happening around the WORLD. Even if they do not buy directly, once a piece of equipment is depreciated on paper it may leak out of our economy and into the East. I would also suspect a harder look at financial statements to determine why they are doing so well.
And vice versa.
Stronger dollar? In what Universe? Tax rates in US are more than double those of the EU, still the dollar keeps falling against the euro, now going back to 1.3 again.
Ahhh, remember those fine fine days of a decade ago, when gasoline barely exceeded a dollar, the economy was golden, and no one worried about terror attacks on U.S. soil....and the dollar was the DOMINANT CURRENCY, right?, uh, well, let's check on that....
Since I know you guys are numbers people, maybe someone should do a graph....
Below is the U.S. dollar to Euro exchange rate, circa 1995.
March, April, May, June, July, 1995
U.S. Dollar to Euro exchange...
1.30, 1.32, 1.30, 1.31,1.33
wha....huh, how the....:-?
By 2000, the picture was a good deal better, but why? What had changed between 1995 and 2000?
2000 exchange rates...
Take the same months, for the sake of brevity in 2000
0.96, 0.94, 0.90, 0.95, 0.93
Then, after 9/11 and the runup in crude oil prices, we are back to almost 1995 exchange rates, same months, 2005, actually, slightly better for the dollar than 1995 but worse than 2000, here's the 2005 exchange rates...
1.31, 1.29, 1.26, 1.21, 1.20
And now, the "great currency collapse in 2006" (he said, dripping with irony), year to date, 2006 dollar to Euro...
January, 1.21, February, 1.19, March, 1.20, April, 1.22, May, 1.27
http://www.x-rates.com/d/USD/EUR/hist2006.html
Does anybody really believe that the runup in fuel prices and commodities are caused by a "currency crisis" this year? If so, why wasn't that the result in 1995 when the Dollar vs. Euro rate was worse?
And remember, the Euro looked much more promising in 1995 when people still accepted the EU as legitimate organization, before the referendum collapse and when it was still believed that the major members were attempting to obey European directives on economic integration. No one in their right mind believes that now. One more little side note concerning the "peak oil" issue....the 1995 strenth of the Euro was based on the belief that Atlantic North Sea oil/gas would not peak until 2010 or later...we now know that belief to have been a grave error, with the British North Sea declining much faster than expected, and the Norwegian North Sea in grave doubt....If peak oil is going to cripple America, it sure ain't going to do Europe much good either....
Folks, please, for your own sake, be VERY leery of the Euro, don't take my word, but google the European situation....the Euro is nothing but a glorified travelers check, and has been nothing except a way for outsiders to help subsidize a grand European experiment, one which so far is failing badly.
Roger Conner known to you as ThatsItImout
Don,
I won't argue with you on that, most folks seem to have no real problem with some gold lying about, and in 4000 plus years of human history, it's hard to find many folks who are at the heart of things "anti-gold" :-)
Of course, you can't eat it...back in the 1970's I had a friend who was the ultimate doom and gloom type and he once asked,, given his views of oncoming catastrophic collapse (remember, in the 1970's, everyone was absolutely certain that our children today would have grown up in a "Mad Max" world, and we would be in our second generation of "post peak" collapse by now!), anyway, I told my friend I had some investments for him...
"canned food, a can opener, guns and ammo...."
....he took me completely seriously....
Roger Conner known to you as ThatsItImout
Generally, it is difficult to separate the economics from the politics, but the euro has been very well received by all the people doing business within Europe (well, except for the banks, who after struggling mightily, were forced by court action to give up several lucrative revenue streams in money changing).
As a world reserve currency, the euro is at best so-so, though still a better contender than all the others, if only because it represents a similar sized slice of world economic production.
Personally, I don't thing the euro is very well understood in the U.S. - essentially, it is merely a visible symbol of European economic integration, which most Europeans support well enough, even in the cases where it seems to be against their short term interests. (This is written in Germany, which on balance is pro-EU, and of course, very pro-export.)
In Europe, it is standard for money to get outdated - that is, paper money has always had a very real expiration date in daily life here. Switching from one style of paper notes to another wasn't that big of a deal, though the coin conversion ended up costing a fair bit of change.
A surprising number of people, in the U.S. and in Europe (not too surprisingly, often Fench) see the euro as some sort of political/economic symbol of something with world shaking implications. Most people here see it as a way to pay for things.
At this point, the euro is no more and no less likely to 'fail' than the dollar.
As for exchange rates, check out the range of the German mark to the dollar in the mid-80s (dollar crash, the second) - nothing like a roughly 250%+ swing to cause some economic dislocation.
<As for exchange rates, check out the range of the German mark to the dollar in the mid-80s (dollar crash, the second) - nothing like a roughly 250%+ swing to cause some economic dislocation.>
Boy, do I remember that one!! I had my eyes on a brand new BMW 633 CSI coupe....all decked out in a Road and Track magazine test, it was about $16,900 bucks if I remember correctly...but by the time I looked again about a half year later, it was over $31.000!! What amazed everyone was that they kept right on selling into the teeth of the wildest currency ride ever, and proved to the Germans that they could price stuff at about whatever price they chose!
(well, at least until the Japenese Infinity and Lexus models starting snatching the luxury sedan trade!)
Roger Conner known to you as ThatsItImout
Why don't you came here to see for yourself?
Did the US federation came to be overnight? It won't here either.
I are ignoring the huge difference in tax rates between the two central banks today. I should remind you that in 1995 the euro wasn't circulating.
The Euro did not even exist until 1999!!
"The euro was introduced to world financial markets in 1999 and launched as a currency in 2002. All EU member states are eligible to join if they comply with certain monetary requirements."
http://en.wikipedia.org/wiki/Euro
The Euro (it was once going to be called "ecu" for European Currency Unit, but that never caught on) has a much longer (and seedier) history than most know, or than many Europeans want us to remember....
http://news.bbc.co.uk/hi/english/static/in_depth/business/2001/euro_cash/history/default.stm
http://news.bbc.co.uk/hi/english/static/in_depth/business/2001/euro_cash/history/3.stm
Maastricht Treaty
In 1991 the 15 members of the European Union, meeting in the Dutch town of Maastricht, agreed to set up a single currency as part of a drive towards Economic and Monetary Union. There were strict criteria for joining, including targets for inflation, interest rates and budget deficits. A European Central Bank was established to set interest rates. Britain and Denmark opted out of these plans.
But it goes back even further than that...
Birth of the European Monetary System
It was the economic crisis of the 1970s that led to the first plans for a single currency. The system of fixed exchange rates pegged to the US dollar was abandoned. European leaders agreed to create a "currency snake", tying together European currencies. But the system immediately came under pressure from the strong dollar, causing problems for some of the weaker European economies.
The Euro was NOT released into circulaton on the day it was created. Part of the reason for Maastricht was "uncontrolled" Euro dollars, in which each individual nation in Europe was loaning and trading in the old "Euro-dollar: pegged to the American dollar. The problem was they were printing those in an uncontrolled fashion to use internationally, with no controls on the amount created, and not nearly as many dollars in reserve as they were printing in Euro dollars (this is in fact a very old scam)
I quote here from a dusty old book, Alvin Toffler's "The Third Wave", (and allow me to shout here, "WILL SOMEONE GO OUT AND GET A COPY OF THIS BOOK!"
You can get it used at Amazon for nearly nothing, and you will see that ALMOST EVERY ISSUE you guys are talking about was already KNOWN and in play in 1980. THIS IS NOT NEW NEWS!!), now, allow me to quote...
"By 1978 a panicky Business Week magazine was reporting on "the incredible state of the international finance system and the 180 billion had mushroomed into some 400 billion dollars worth of Eurodollars, Euromarks, EuroFranks, Euro Guilders and EuroYen. Bankers dealing with the supranational currency were free to issue unlimited credit and not being required to hold any cash reserves-and able to lend at bargain basement rates. Today's estimate {this was circa 1980} put the Eurocurrency total as high as a trillion dollars."
Folks, this is what the Maastricht Treaty was supposed to fix in 1991, with it's so called "strict criteria for joining". There is only one problem:
Almost no nation runs in complience with the "strict criteria" later called "momoranda of understanding", least of all the two big ones, the Germans or the French. They are are out of complience on the big issue (debt to GDP) and resist paying their "contribution" to the EU at almost every opportunity.
This is the modern Euro we now know...
Euro launch
"The euro was launched on 1 January 1999 as an electronic currency used by banks, foreign exchange dealers, big firms and stock markets. The new European Central Bank set interest rates across the eurozone. But "weakened the value of the euro on foreign exchange markets."
But as we now see, Euro currency had preceeded it, and was assigned an exchange value by traders, and the big difference now was the birth of the so called European Central Bank. The last sentence is important because the so called "uncertainty about its policy and public disagreements among member governments" has NEVER been resolved, and as recent referenda defeats have proven, the Europeans themselves seem very doubtful about the whole scheme themselves.
The overlords in Brussels will stand behind it of course, because it has been a very lucrative game for them and for Europe internationally.
The Europeans now accept the Euro because they have no choice, the destruction of the old national currencies was PARAMOUNT in removing any opportunity to dispute the terms of the game...the Americans accept Euro currency because they have no sense...
If the history of the Euro sounds convoluted and illogical, that is because it is. It is a currency whipped up out of thin air and prior currency exploitation and printing, loaning and decisions made by fiat, based on organizations that cannot come to agreement on anything, and with no proven reserve of any kind accept the pittance they can bleed out of soveriegn member states, many of whom sneer at the "strict criteria" once layed down by the Maastricht Treaty.
But the Americans still see their European cousins as the "Ubermen" of history.
As the European dramatist once quoteth, "Such Is Life"....the whole thing is a farce.
Roger Conner known to you as ThatsItImout
On the dollar vs Euro exchange rates, I simply used a very well known and accepted currency calculator link, and used their stats...and they did in fact ascribe an exchange rate back to 1995 (4 years after the Maastricht Treaty)
If you feel that the webite (I enclosed the link) should not be posting such comparisons, by all means, email them...I differ strongly that the Euro "did not exist" in years prior to 1995...it was passed off in a variety of formats, but my remarks were intended to show that a type of "Euro currency" has been around a long time.
<It is unlikely anyone is going to be convinced by your argument if you can't demonstrate a grasp of the underlying material.>
What else can I use but the Europeans own accounting of events? The links giving the history were from the BBC, not normally considered a bad source.
This brings me to...
<The discrepancy needs to be addressed directly, not by posting a history of the Euro, which is probably quite well known by most of those paying attention to your comments.>
No, I don't think that is true. Most people seem to think that the Euro appeared out of nowhere in 1999, no fuss, no muss, given to the world as a gift by the wise benign overlords from Belgium and has since marched off to towering superiority.....
I must say this, the amount of romanticism attached to people's view of Europe here is ASTOUNDING to me.
This brings me back to what you call < your argument>.
My argument is very simple: Be careful. There are brokers out there passing off the Euro as the currency of God based on a combination of American's tendency to think the Europeans are somehow superhuman and Europe has none of the problems of America, and by an extremely troubling "self hatred" by Americans of their own nation.
Look, if you don't like Bush, fine, if you think America is on the wrong path, fine, if you think as one poster said on TOD recently, "Americans are evil and deserved to be punished", fine, and if you think Peak Oil will end all existance of life on Earth, that's fine, I really don't care.....just BE CAREFUL, and don't let this wild eyed devotion to enjoying the destruction of America and it's currency lead you to make what could be a poor financial choice....I use the Euro vs. the Dollar simply because so many seem to be deluded about the superiority of the Euro and the European situation in general. Again, my whole argument: Be careful, investigate, read, and then if you choose to go after the Euro dream, I wish you only the best of fortune, it's your money.
Roger Conner known to you as ThatsItImout
People are irrational and if everyone else collectively believes in the Euro MORE than the dollar and they ACT on it, the $ tanks faster and harder.
It steps like IRAN opening their oil bourse that creates a "feeling" within the middle eastern world and possibly Asia.
It has recently come to my attention that you consider your national currency, the United States dollar, to be worthless. I will be extremely grateful to receive as much of this worthless, and no doubt bothersome, currency as you can currently transfer to me.
In addition, would you be so kind as to refer me to any other individuals who wish to rid themselves of the burden of worthless dollars?
I would be happy to pay any reasonable wire transfer fees.
Sincerely yours,
John Q. Publicke
which is irrational, your first belief, or your second?
Orange bongos are totally useless to you, you cannot eat them, plow with them, or even sit on them. BUT, you MUST, somehow find 21 of them in the next few days. Even if you must work day and night for someone that has a few or them. And then trade half your canned goods for a couple of them. Etc.
Fiat money can be used to pay taxes. That, and that alone, gives it VERY real value.
i think what you really want to say is "potentially worthless" were it not for the long history, and continued trend, of popular belief.
somehow, you continue to believe your own independant belief (that money is 'worthless') is reasonable, even after you make that (correct) first statement.
And in the mean time its fun to find new ways to deface the bank notes that pass through me. "Central banking is not human nature" is something I like to write on them once in a while.
Central banking is not human nature and its Malthusian conclusion is no delusion.
With the end of oil financed economic growth the equity markets will tank - the money has to go somewhere and with oil induced high inflation, it won't be into bonds (particularly US Treasuries !)
I don't know what will happen to the industrial commodities - presumably demand will drop due to recession and so will the price. But Gold is different - the safe haven - and when the world wakes up to a new economic reality there will be a flight to safety.
The price of Gold will go through the roof - unless of course we are completely wrong about Peak Oil - in which case its a big bubble waiting to burst.
Actually, most of the money won't have to go somewhere - it will have just gone.
Unmanaged peak oil will reprice the world economy and the money will simply have vanished.
In the severe economic catastrophe some PO adherents predict there will be massive debt defaults and thus alot less money around. The price of everything would collapse, gold and oil included. Conundrum? You bet.
Even if the Fed were to "print" inflationary money, real prices would still collapse. The ultimate "price" of anything would boil down to its utility, which of course is tiny in terms of today's prices. Think about it.
Ultimately in the worst case only food, water & maybe guns will have real value - shiny yellow metal will be worthless. But personally thats beyond what I can prepare for or even think about.
When the markets collapse alot of "money" will disappear - as it did in the dotcom collapse but alot of whats left will head for perceived safety of gold.
Might be pointless effort - but if we believe in peak oil surely its a good bet.
The commodity price boom is driven by a fundamental reassessment of the value of relatively scarce commodities compared with the 'value' of relatively unlimited money. G8 Central banks are increasing money supply (M3 type measures seem to be the most appropriate) at between 8% and 12% per annum, so money supply is increasing quite rapidly. Certain important commodities are constrained by the speed they can be produced and / or their total recoverable reserves. Price inflation is inevitable when demand exceeds available supply and the supply of money is increasing.
Basically, scarce commodities are becoming more valuable relative to fiat money. This trend will continue and widen, I expect soft commodities (grains, coffee, other basic foodstuffs, water) to show similar price increases starting about now. We could be in the first tremors of the breakdown of our present money system.
Roger seemed to misread your post as being personal to the US$, that is a different issue.
The commodities bulls say we are in an inflationary economy--at least in the US. Commodities, especially precious metals, are a hedge against inflation. Precious metals, unlike industrial materials and petroleum, also happen to be a good thing to have in your portfolio during an economic downturn.
Obviously the growth in Asia increases demand for petroleum and industrial materials. But it is also fueling the boom in precious metals. Asians have to do something with the dollars flowing their way, and they traditionally like to put their money in gold/precious metals. With a declining dollar, the incentive to do so only increases.
The same is true for the Middle East with all of the petrodollars flowing their way--a lot of those dollars are being used to buy gold.
Markets do not move in a straight line, and we will have corrections along the way as we have just experienced. But the only real threat to petroleum and industrial materials is a downturn in the economy, which may very well be on the horizon later this year as housing slows and the easy re-fi money dries up. Combine a slowdown in housing with higher fuel prices and credit card rates, and the U.S. consumer could be taking it on the chin by this summer. Needless to say, consumption drives the US economy.
Gold/precious metals would still be good to hold during such a downturn, but I'm not planning to buy any more at these levels. Energy is still a rock solid investment for the long term, but we might see some declines later this year if concern about the economy grows.
One possible scenario: energy stocks rise until some point during the summer with rising crude/refined product prices, but then decline as lackluster summer home sales and vacation travel takes its toll on the economy and reduces petroleum demand.
Who knows what will actually happen, but this is my read on the markets.
Their are MANY scenarios that could develop, and I see this portfolio as a "Head I win, Tails, I don't lose much" choice.
Unlike gold, electricity has fundamental econmic value and utility "as long as the lights stay on". Hydroelectricity is always the loweest marginal costs source and it does not deplete. It often competes against natural gas as a source fo power.
If things look MUCH worse, I will get several thousand $ of nickels and a mountain of canned goods.
Essentially the Germans told all the farmers that the government owned half their farm and they wanted the rent. Japan did it at 10 to 90 % depending on how much land you owned and whether you owned and farmed or just owned it. This included houses, shops, etc.
This allowed them to charge lower marginal taxes, thus increasing the incentive for people to work. Germany doubled it's GNP every five years for twenty years. Japan doubled it's GNP every five years for twenty five years.
How much do we have in hard assets vs how much do we have in social security obligations? What would it cost to build your house again? Your place of business?
So what is 10,000 shares of a New Zealand hydroelectric company worth after the social security mortgage is considered?
Probably less than the Swiss hydroelectric company and more than the NZ natural gas fired utility (after their major offshore gas field depletes).
Internal political and economic risk exists. A simple fact. The lowest risk investments STILL have risk.
Diversifying into multiple nations reduces portfolio risk. Buying renewable energy with VERY long life is also good risk reduction IMHO. (Note that property taxes declined as a major source of revenue over time in Germany & Japan).
I will wager that a NZ hydroelectric utility will still have considerable value under any scenario, despite their current problems. Less or more than today ?
I am still waiting for a good entry point, which may give you my personal answer.
I also own a small amount of stock in FLA (Florida East Coast Railroad + FL Real Estate), some medical equipment makers, US based exporters (Harsco), deCode (DCGN), GE, etc. Hydroelectric producers are almost half of my portfolio, but not all of it.
I see the US $ and US economy as major risks that I am reducing exposure to. I have a diverse mix :-)
What security is safer than stock in a Swiss hydroelelectric utility ? The value may flucuate BUT there is some value there ALL the time !
Gov'ts own majority shares in a couple of my holdings; Verbund (Austria) and CIG (NYSE listing, Brazil). Another bit of security in a way.
Brazil will be oil self sufficent in a couiple of years, they are the world's third largest agriculture exporter. Etc.
Last 18 months, prices are up 50% to 100% on all except Canadian incoem trusts. There, relatively flat but yields of 6% to 9%.
However, one can get most Toronto stocks via TD Ameritrade (they offer free trades & $100 fro new accounts), just get dual currency account (US & Can). US $ versions via pink sheets BUT experience is needed before trading those (ALWAYS limit orders, track Toronto & exchange rates, etc.).
I opened an account with a Swiss broker (fairly expensive even for their "discount" broker).
Also, with a CUSIP #, eTrade will try to execute most trades. Most are one day only executions though.
Some that I will disclose are Moto-Columbus, Verbund, CIG, Great Lakes Hydro.
"Including some new research on real estate, we now have
30 completed bubbles (2 standard deviation upside breakouts
above trend line), all of which came back to the preexisting
trend. Of these, we now believe 29 were genuine
bubbles, and one - oil - was a paradigm shift that nevertheless
managed to just retouch its old trend 3 years ago.
Statistically, there is not enough data to know for sure if oil
today is a paradigm shift or a 4 standard deviation (sigma)
event, but that's what makes our business so interesting."
"Exhibit 4 shows
that for the 100 years or so before that, the trend line price
was about $15 a barrel in today's currency. After 1974, the
new trend seems to be about $35 a barrel.
If we believe the old trend is still intact, then the 1980
peak was a 5.2 sigma event or a 1 in 11 million occurrence,
and the price today at $60 would be back to a 4.2
sigma event and a wonderful shorting opportunity. If you
believe our paradigm shift argument, however, the 1980
high was just an `ordinary' 2 sigma, 1 in 40 year event
above the new higher trend; the low in 1998 was also a 2
sigma event below the new trend; and the price today is
merely a very normal 1.3 sigma, 1 in 10 year event, where
mean-reverting players are interested, but not frothing at
the mouth."
"Key is the conflict
between strong global demand - buttressed by the growth
in China and India - and a finite oil reserve."
"In the meantime, we are thrilled to meet our first probable
paradigm shift or "new era" and are grateful to have
been lucky enough as dedicated mean reverters to have
been totally unscathed by it so far."
It is a very thought-provoking discussion. Unfortunately, paging through the Research & Commentary section, I don't see the relevant .pdf document. If anyone is interested, ask -- I'll see if I can find the relevant link. I have the .pdf saved to my hard drive, but of course that doesn't help anyone here...
If I recall correctly, the registration process is almost painless -- I think you can get away with just an e-mail address and a password. To the best of my knowledge, GMO does not use your e-mail address for anything -- I've never received any communications from them, for what it's worth.
I highly recommend Grantham's piece.