(Still) Waiting for the Crash in Commodities

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.
Good Heavens! They're foolish enough to talk about a "strong dollar"!
To be fair, they could only find one person foolish enough to expect a stronger dollar (maybe the interview was done a year ago and forgotten about?)
I would have thought that believing higher prices create more oil in the ground would be a challenge (and a pretty weak one) to the laws of physics.
But no, apparently the lines on a chart have mass and are drawn toward its base by the curvature of space-time.
Who knew?
From the article:

"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.

That's because of the old rule of thumb that profits cause competition and outrageous profits cause ruinous competition. He's terrified that everybody and his brother will open copper mines and crash the market...as is usually the case at the end of (and causing the end of) every commodity boom.
How very true...recent example closer to home: bandwidth and telecom eqpt. Take a look at  this:
The prices of copper are causing more harm than good to Chile because the Chilenean Peso is getting stronger so, the overall competitivenes of their economy is going down.
The bull market in commodities...is beginning to challenge the laws of physics.

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.

Man Group's executive president and head of global metals, Fred Demler, believes a stronger US dollar will cause prices for most commodities to decline. "And when prices do fall, it will be the correction of all corrections."

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.
Excellent point on the medication. The bull market is challenging the laws of economics (are there any apart from greed is good?), the price of oil is just matching the laws of geology and physics (and politics at the moment). Economics cannot create oil. Geology dictates what you can extract from the ground.

There is no Law of Bull Markets in Physics as far as I know.

O.K., I should let sleeping dogs lie, but I am on a long weekend from the only club that pays me to show up (my employer) so why not have a few provacative blows at this topic...

>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.

<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

Dear TII/RC,

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.  

So what? The volume of other derivatives traded (foreign exchange and interest rate contracts)outstrips the volume of the underlying assets to a vastly greater extent than with oil. Who cares?
Currencies, bonds, stocks, etc. are not commodities, though they do trade in futures exchanges. Comparison between the two is completely inappropriate and irrelevant. Think of just this: currencies are units of measurement, not goods themselves.
Currencies have value. Commodities have value. Under our economic system, the distinction you make is no more than a phantom of the mind.
We can print increasingly large amounts of money, and have. We can mine increasingly large amounts of metal, and haven't. It's going to take a while for the copper mines to increase enough to make up for the way the dollars have been increasing. Figure on a lag time of five years minimum, and that's assuming that we don't do something really, really, stupid, like fight a war with the Moslem world.
Currencies are a means of measuring and thus exchanging values. They have no inherent utility value themselves; that has been so for ages.
This is only true of Fiat money.  If we remained on the gold standard or any hybrid with silver, their would be implied value (i.e. dollar for set amount of gold).
Well, of course. Gold or silver currency is just...gold or silver.
Where on the financial pages can I find a list of utility values (in your sense)?
Utility values are derived by any given person in the absence of money.  So if there were utility values published I think they would be completely open to interpretation.  
Nowhere. That is the point.
So why should I worry about them, if I am interested in what the oil price will be? And why should I be concerned about the high volume of trading in derivatives of oil contracts?
You will need an understanding of derivatives and wikipedia is great for that.  Basically derivates have created a lot of "stuff on paper".  Businesses engage in off balance sheet activities like credit swaps where two companies basically swap credit access so on net they are both better off, but barely.  Bur barely when talking about billion of dollars, turns into a lot.  So when we are trading 10 times the amount of oil available, it shouldn't take much more to figure out the consequences.
My question was a rhetorical one. I cannot for the life of me see why the price of oil should be likely to fall sharply, just because more futures and derivatives of oil are traded than there is physical oil being delivered.
I see you're point.  I think futures trading may have sped up the price increases a little faster and now that the long term implications are becoming more and more clear, the futures traders are going to make that much more money as they ride this down.
Because when there is a sudden rush to close open positions in futures and other derivatives and the "paper" stuff overwhelms the "real" stuff 10-to-1 there is no demand for the excess from the physical trade (eg hedging) and therefore a plunge ensues. Since prices for the "real" stuff today get set to a very large extent by marking to the futures market (the tail wagging the dog) the price of physical "stuff" collapses as well.

The game can be played from the other direction as well, of course; and it has been - oh boy has it ever...

But back to the original point, what hellasious describes most likely won't happen as the finite nature of oil will become too large to ignore.
Your answer would explain a strong movement of the price in any direction. But it does not address my question, because
  1. You still have to show empirically that trading has actually become more volatile with the growth in derivatives volume. By the way, I doubt this is true.
  2. You have not shown why we should in the near future expect a sudden rush to close open positions.
Emperically volatility in the current market is actually at it's lowest levels in decades.  I can't find the right chart though.  I will keep looking.  

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.

I'm sorry, but at this point I respectfully suggest you refer to a good book relating to the basics of commodities futures and options trading. The questions you pose indicate you are unfamiliar with most all basics and while I would be otherwise inclined to provide such an education I am afraid the medium is not appropriate.


Well, if the medium is not appropriate, you could at least refer the readership here to a good book relating to the basics of oil futures trading. I think that would suffice for providing such an education.
Whenever you want to learn anything head on over to wikipedia.com  It may not be completely accurate it will provide a very thorough basic foundation for most queries.
Any search in your favorite internet bookseller will turn up dozens of books - pick whichever you like best. Alternatively, if you want to get more serious about this, NY Inst. of Finance has several appropriate courses. Again, this site is obviously not the medium for commodities training, so I must take a pass at providing it myself, here.

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:

  1. 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?

  2. 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.
Fair enough. What is the daily volume of Nymex/Ice oil futures trading, excluding all the refined/distilled products such as the the gasoline and home heating oil you mention?

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?

Just the crude oil is currently abt. 570.000 contracts/day or 410.000/day adjusting for Sat. and Sun. You should not deduct the products however, since they all come from the same barrel of oil. But it is still huge, even if you do deduct them. In 2000 it was around 180.000 and in 1995 around 120.000 - both oil only and adjusted for Sat and Sun.

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.

It is very possible that every contract relates to a real barrel of oil. I cannot see how it could come to pass that there were more contracts than barrels. If 410000 contracts are sold per day then that translates to 410 million barrels. World oil consumption 83 million barrels so about 5 to 1. However the same contract could be easily sold 5 times in a day. This is the cause of the high trading volume. Look at share volumes.. Since the internet boom volumes have risen dramatically however the total number of shares issued in some companies hasn't changed. Furthermore, it is likely that it is because due to the very low spare capacity, oil has to be incredibly efficiently delivered around the world, this means that at any one moment one refinery might need more or less from different suppliers but overall there is very little room for mistakes, resulting in contracts changing hands on a very regular basis.
Oops sorry i'm being foolish. We are talking about futures contracts so there are 72 days worth of contracts at one time, ie 83 million * 72 = approx 6 billion barrels. If 410 million barrels worth are traded daily that is 14% of total contracts. This level of activity is required for the logistical reasons quoted above as well as speculation.
Why not ask the powers-that-be at TOD if you can put together a guest post on the topic?
A guest post from a pump-and-dump (or in this case, short-and-dump)artist? That'll be a first!
Get back to me when you think of answers, eh, Mr. Expert?
Who cares if derivatives oustrip phys assets, most expire anyway and simply used as a hedge during their life.
That's the point.
It might mean that the amount of speculation in the oil trade has increased considerably. The logical result is larger volatility. Personally I wouldn't be so surprised if oil retreats to $50 or less in some panic driven sell-off. Why not? Recent pieces of information suggest that the market is not so tight to sustain those prices (yet), especially if Iranian saga settles down (my prediction) and the scheduled projects come online (also very likely, IMO).

IMO we often forget that PO is an event measured with decades; in the meantime there is enough room for many boom & bust cycles.

You've mentioned two events that might cause oil prices to retreat, although a crash seems highly unlikely. I can think of a 100 events that could cause oil to go much higher in a very short time (terrorist attack on oil facility, bad hurricane season, Iran invasion, domestic terrorist attack, runaway inflation, etc.) It's not just the supply/demand issue (although that is compelling), it's also the fact that so much of the world's oil supply is located in politically unstable areas of the world. Unless peace breaks out all over, I don't see oil prices declining below $60.
I don't care what the crude price is I see a price floor in the STL area at maybe $2.50 and that might be low.  I just don't see it ever being cheaper than that.  The barrel price doesn't translate well to most people.
I think volume traded is a misleading number because the same contract can change hands many times which increases the volume while the open interest of the underlying commodity stays the same. Still, Im sure there has been an increase in paper oil and pure speculation.
Dear Stranger,

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.

Commodity tops, like stockmarket bottoms, are driven by fear and therefore tend to be sharp spikes such as we are currently seeing.
I think ThatsItImOut has a point here.

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.

I suspect that the limiting factor in  extraction of aluminium is electricity.  I've heard it reffered to as 'frozen electricity'. So the fact that there are mountains of bauxite (well plains of it really) in OZ means nothing if it costs too much to smelt.

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.

You're absolutely right about Aluminum which is 8% of the elemental composition of the earth and Fe which is 5%


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.

There are few metallic elements on the moon, as Nasa discovered over 3 decades ago. It is composed of the lighter materials left over in orbit after a massive terrestrial impact (a glancing blow at that) with the earth during it's formative stage.  Oxygen and silicon comprise nearly 80% of the moon's elemental composition.
My god, did you get that one wrong. The top few hundred miles of the moon is composed of meteorite debris. The rocky moon is a long ways down. There is lots and lots of metal on the moon. My god, you can hold a magnet to lunar regolith samples that we brought back and they will be covered with nickel iron particles.
Meteorite ejecta (regolith) is one thing, actual terrestrial (or in this case lunestral) material is something all together different.
The ejecta regolith is just the "crumbs" on the surface of the cake.
Enjoy your Japanese overlords ...

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.

I suspect that the limiting factor in  extraction of aluminium is electricity.  I've heard it reffered to as 'frozen electricity'. So the fact that there are mountains of bauxite (well plains of it really) in OZ means nothing if it costs too much to smelt.

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.

Apologies for double post.
While I agree with you entirely on the lack of merit or long term substance in the euro you might be interested in this article on gold.There is quite a discussion going on about this "barbarous relic" but in a world of "money" owing its allegiance only to Caxton people have always turned to something more tangible.
Actually, if one's not in one of the richest countries on earth, one does see people picking up cans and piping.
And you seem to have bought into a lot of wingnut nonsense about Muslims in Europe.
People pick up cans and bottles here in Michigan.  Deposits get people to do that.  Heck, if someone has thrown a returnable bottle into the plastics recycling, I'll usually pull it out myself!
Their are different types of commodities and gold is a store of value, copper isn't.  It can be recycled in large numbers if we really wanted to.  The same goes for aluminum, but we choose to throw it away instead.

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.  

Roger, I am definitely no economist but am interested in your thoughts on the currency issue.  I think a reply to your dollar confidence from the opposing "currency crisis" camp might be: 1) What about our extreme national debt combined with 2)our enormous trade imbalance and 3) the potential moves away from energy trading in dollars to trade in rubles or euros.  If the US is not producing any goods or services that anyone wants (with the exception of military hardware), what is to prevent the rest of the world from seriously loosing faith/trust in our ability to do anything other than print paper and threaten war.  
Commodities crash when supplies surge. I read somewhere that copper supplies = 2 weeks of world demand - doesn't look to me like we're surging yet. Regarding oil... us crude supplies are high, but would not be unusually so if commercial stocks repaid 15mmb loans last fall from SPR, apparently not soon to be repaid.
Actually, no, it's not always like that. If you are a physical commodity merchant, you maintain an inventory for your regular day to day business needs. If you think prices have gone way too high and will be coming down soon you reduce your stockpiles and just buy enough from the spot market to satisfy your regular trade demand. Falling inventories are also an early sign of falling physical demand (think about maintaining a steady inventory/sales ratio).

And vice versa.


Maybe you're not seeing a surge in commodities, but a sharp fall of currencies.

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


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

I'm sorry, Roger, but as long as it looks like Washington seriously wants to start WWIII, and the fed looks like it really wants to inflate the dollar, I'm going to hedge with some gold.


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

Well, the roughly 300 million+ people using the euro don't actually seem to agree on the gloomy future of the euro.

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

From your comments I see you don't live in Europe.

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.

Uh, one major problem with this theory:
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."

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....



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

Uhhh. I don't understand. You made a bunch of statements and an argument based on Euro-USD exchange rates, which as I believe, and two others here have pointed out, could not be valid, since the Euro didn't exist in half of the given time frame. And this is your response? Nothing you post above seems to repudiate that view, and yet you continue to expound on the subject. It is unlikely anyone is going to be convinced by your argument if you can't demonstrate a grasp of the underlying material. 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.
To Oil CEO...

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

None of this matters.  The value of ANY fiat money is derived by the trust of the people who hold it.  If the European people BELIEVE in it, it will succeed.  It's no different than the people here believing in our worthless currency.  

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.

Dear Sir or Madam,

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

Worthless is relative....and I'm a realist.
Worth less is realistic. Worthless is not. What a difference a space makes, just a few empty pixels...
amusing contradiction.  a fiat currency only has money if everyone believes it it.  everone believes in our fiat currency, but it is worthless anyway.

which is irrational, your first belief, or your second?

amusing typo.  a fiat currency only has value ...
What if someone with more guns than you threatens to take your house, farm, car, etc. from you unless you produce 21 orange bongos.

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.

Ah, but does it have utility value, or just value?
Ah, but i just happen to have 21 orange bongos!!
it's worthless to me b/c I do not believe in it.  However I am a realist and as long as the people of this country collectively agree on using this, I have little choice.  I mean REALLY, who is accepting payments in this country in anything but the dollar?
again, it is funny to proclaim it is "worthless" and then explain that you use it.

i think what you really want to say is "potentially worthless" were it not for the long history, and continued trend, of popular belief.

You're still missing the point.  It's about the belief in real value.  It has real value because you believe it does.  I'm talking from a pure economic stand point.  That money in your pockets is worth what the collective country agrees to.  When the price of milk doubles overnight, if you do not feel it is worth double the price then what is the value of that milk?  It doesn't matter, if you want the milk you pay the price and you AGREE in economic terms, that this is a fair price.  So has the value of the milk gone up?  No, but the money you need to fork over increased.  You're money is worth less and it happens every day.
you've admitted money has value because everyone else believe it does.

somehow, you continue to believe your own independant belief (that money is 'worthless') is reasonable, even after you make that (correct) first statement.

jeez, i could have worded (and spelled) that better!
A better statement would be it is worth less, rather than it is worthless.  Very good point.
I am late .. sorry. Anyhow, yes fiat money sucks and is worthless trash created to control us. And because it pays the taxes (among other things) it is largely recognized. What can you do? Start your own money system. I plan to. Well, actually I plan to work on the task with others. I plan to abolish the old ideas about money and nations. Do we need either in their current form? I was born here but I dont believe in Canada any more. I wont be doing my census. I dont buy in anymore.

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.

When oil hits $100 and keeps going and the world wakes up to the reality of Peak Oil - then surely the outcome is global recession and market panic.

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.

With the end of oil financed economic growth the equity markets will tank - the money has to go somewhere

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.

It seems you are somewhat unfamiliar with what "money" is and how much there is around. "Money" is created most commonly by taking out a loan: e.g. the US govt. issues a bond for $1 billion and that adds to "money". If it were to repay it (net), or default on it, "money" will disappear. Same with your credit card, mortgage, etc. If everyone were to suddenly repay or default on their loans there would actually be negative "money" around.

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.

I suppose I am trying to plan for the early phases of peak oil, a powerdown scenario where we enter a recession/depression but society and the international finance system still functions.

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.

Spot on, Lads: "Maybe you're not seeing a surge in commodities, but a sharp fall of currencies."

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.

Normalized to inflation the commodity index is only about 1/3rd of a typical cycle high level.  Agricultural commodities are near all time lows.  I expect a bull market correction in many commodities, but this cycle has another decade to run - even without peak oil or dollar decline.  Taking dollar decline and PO into account, there probably won't be anything like a bear market cycle in commodities again until the population drops drastically.
Are we in a growth economy or an inflationary economy?

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.  

Globally it is a growth economy. The shift in capital investment from the slow growth first world to the fast growing third world implies that this round of global growth will continue for a long time (at least until oil depletion stops it). Oil depletion will affect the US economy but this shift of capital (productive) investment to the third world is coinciding with oil depletion and is even more influential (so far).  
I am investing a good % of my assets into hydroelectric utilities (or merchant power providers), mostly in nations that will do reasonably well post-Peak Oil.  Diversified accross several nations; Canada, Brazil, Switzerland, Austria, and looking for a good entry point into New Zealand.

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.

How are you doing that, buying shares in the companies involved? If so doesn't that rather hope that the markets won't crash? (I've seen a lot of similar doom predictions for the stability of the financial markets should we get into trouble)
After the second world war both Japan and Germany paid off their social security obligations by levying very high taxes on fixed assets as soon as they took over from the occupation governments.
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?
> 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 :-)

All markets will not crash (as in disappear) at one time.  Thus geographic diversity.

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%.

What companies, and how did you make your foreign investments?
Several are thinly traded and I am still trying to add to them.  So I do NOT want to drive up my own price.

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.

Jeremy Grantham of GMO ( http://www.gmo.com/america ) had a thought-provoking few pages in one of his letters, dated July 2005. His basic idea: oil at this time may be that rarest of exceptions -- a paradigm shift. After analyzing about 30 bubbles, he suggested that perhaps the oil market had entered a qualitatively different period. A few excerpts:

"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...

I want to read this...can you send it to me?
Okay, I found the relevant .pdf file. After you've registered for free at the GMO site, you click on Library (the right-most choice among the options along the top), then click on Jeremy Grantham's Letters (the top-most choice among the options along the left), and then choose Ho Hum (Revised 7/27/05). This is a .pdf of 13 pages. The relevant passage is on pages 4 and 5, the title is "At Last, A Paradigm Shift: Oil". The chart on page 5 is somewhat mind-blowing, or at least it was to me, when I studied it carefully.

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.

Thanks I'll look at this tonight.