Gold and oil bubble ready for a collapse?

[Tulpen]

Gold seems to go through the plunger right now, last quote: 897.07 at 1:04 AM PST.

Oil is following.

[phirang]

CB intervention to prop up USD...

[Tulpen]

And there goes $890 ........

[BiscayneSunrise]

A gift from Mr. Market. There is a palpable sense of relief on Wall Street over the interventions of the past few weeks and money is flooding back into equities of all sorts; at the expense of PM's.

Give this sense of euphoria another 2-6 weeks to play itself out. No big rush to re-enter PM's until then. Even though they are looking attractive at these prices, wait until they are even more oversold. Gold under $800 would be a safe buy as would silver at $15.

[GRG55]

Gold seems to go through the plunger right now, last quote: 897.07 at 1:04 AM PST.

Oil is following.

Oil is less than $10 off its all time nominal high. That hardly qualifies as a collapse. Or a plunge.

[Tulpen]

Oil is less than $10 off its all time nominal high. That hardly qualifies as a collapse. Or a plunge.
You are correct, that's why I am still short ;)

[GRG55]

You are correct, that's why I am still short ;)

So am I. But only as a very short term speculative hedge for my long oil equities... :D

[Lukester]

How did I guess this was Tulpen's thread by looking at the title? ;)

Gold and PM's may well go down for a good deal more than a few weeks. We are looking at a long consolidation possibly, enough to get the day trippers bailing out of their "nonperforming" investment. :D

[GRG55]

How did I guess this was Tulpen's thread by looking at the title? ;)

Gold and PM's may well go down for a good deal more than a few weeks. We are looking at a long consolidation possibly, enough to get the day trippers bailing out of their "nonperforming" investment. :D

On oil only, a shake out where we move assets from weak, speculative hands to stronger, investment hands would not be a bad thing for the oils. However, I am not expecting a collapse (1986, now that was a collapse), but a stronger US $ is entirely possible from the deeply negative sentiment and oversold we saw recently. But I will repeat - oil prices can go anywhere in the short term because of its political pricing almost totally devoid of any fundamentals, no matter what the pundits would like us to believe.

[Finster]

Gold seems to go through the plunger right now, last quote: 897.07 at 1:04 AM PST.

Oil is following.

What bubble? You are confusing a bear market in fiat money with a bull market in real stuff. In terms of its purchasing power for other tangible goods worldwide, gold itself hasn't yet gone anywhere. It's the fiat money that gone down.

Hard money prices are best thought of as a high-beta inversion of fiat money values.

Commodities markets will have their ups and downs like any other, sometimes getting ahead of themselves and sometimes falling behind. But the last "commodity bubble" continued until the Volcker Fed finally dealt with the money and credit inflation his predecessors spent many years building up. More recently, the Fed has been in the hands of kin to those predecessors, and now we're talking about another "commodity bubble".

Think about it, folks. All this talk about commodities when the only reliable cause-and-effect relationship seems to be monetary. The Volcker Fed slammed on the monetary brakes in 1980, and what do you know? All those "commodity fundemantals" that multiplied prices by orders of magnitude seemed to evaporate. The Greenspan Fed slams on the monetary accelerator in 2002, and ... "commodity demand" seems to reappear like magic. The Bernanke Fed does it again in 2007, and presto; practically every commodity analyst seems to be at a loss to explain galloping prices in terms of commodity fundamentals.

Get it? You will never understand the big moves in commodity prices by studying commodity fundamentals!

[FRED]

What bubble? You are confusing a bear market in fiat money with a bull market in real stuff. In terms of its purchasing power for other tangible goods worldwide, gold itself hasn't yet gone anywhere. It's the fiat money that gone down.

Hard money prices are best thought of as a high-beta inversion of fiat money values.

Commodities markets will have their ups and downs like any other, sometimes getting ahead of themselves and sometimes falling behind. But the last "commodity bubble" continued until the Volcker Fed finally dealt with the money and credit inflation his predecessors spent many years building up. More recently, the Fed has been in the hands of kin to those predecessors, and now we're talking about another "commodity bubble".

Think about it, folks. All this talk about commodities when the only reliable cause-and-effect relationship seems to be monetary. The Volcker Fed slammed on the monetary brakes in 1980, and what do you know? All those "commodity fundemantals" that multiplied prices by orders of magnitude seemed to evaporate. The Greenspan Fed slams on the monetary accelerator in 2002, and ... "commodity demand" seems to reappear like magic. The Bernanke Fed does it again in 2007, and presto; practically every commodity analyst seems to be at a loss to explain galloping prices in terms of commodity fundamentals.

Get it? You will never understand the big moves in commodity prices by studying commodity fundamentals!

Now at last we have a place where charts and graphs that depict these fundamental iTulip ideas are organized. For the topic at hand, Gold priced in major currencies. (http://www.itulip.com/forums/photoplog/index.php?n=24).

[GRG55]

Get it? You will never understand the big moves in commodity prices by studying commodity fundamentals!

Perhaps. But I will advance the view that one will never, ever, ever understand the big moves in commodities if the only thing one studies is the weight on the monetary accelerator either.

As I have pointed out before, there was no shortage of money printing in the period from 1986 until 2000, and yet through all the time commodities were generally in an unrelenting downward collapse. The Central Bankers can print the money, but they don't control where it goes. I am sure you will agree that we should not forget that the asset class of preference at any given point in time is a function of more than immediate monetary policy bias.

[Finster]

Perhaps. But I will advance the view that one will never, ever, ever understand the big moves in commodities if the only thing one studies is the weight on the monetary accelerator either..

I disagree. All of the big moves are money and credit related. Trying to read the entrails of commodity fundamentals has distracted far more than it has informed. This is further explained below.

As I have pointed out before, there was no shortage of money printing in the period from 1986 until 2000, and yet through all the time commodities were generally in an unrelenting downward collapse. The Central Bankers can print the money, but they don't control where it goes. I am sure you will agree that we should not forget that the asset class of preference at any given point in time is a function of more than immediate monetary policy bias.

The key here is what part of the inflationary cycle you are in and whether credit inflation is at work. We see the same broad cycle repeat again and again. Coming out of the credit destruction of the Great Depression, we began a new cycle of credit growth. This kind of inflation primarily shows up in asset prices, particularly traditional investment assets like stocks. Prices of things conventionally associated with inflation tend to remain quiescent. There is inflation just the same, but it is not generally recognized as such. It's "fun" inflation, so we don't give it a derogatory name. Instead we give it names like "bull market" and "prosperity".

Alas, there are limits on how far credit will expand on its own before debtors and creditors start to pull in their horns. In an effort to keep the good times rolling, we created institutions to try and keep credit expanding forever. It can't really expand forever, of course, but they do manage to keep it going until it's massive enough to really do some serious damage when it finally does collapse. And when it does, it will assuredly collapse no matter what. Yet these institutions, whose life blood is credit expansion, are not going to just fold up their tents and go home. As we enter this part of the cycle, they continue to grow money but it can no longer fuel credit expansion. You get debt deflation and monetary inflation. Now, instead of their investments rising in price, people find that the things they need to live on rise in price instead. Inflation is no longer "fun", and at last it becomes recognized for what it is.

The last such great transition was in the 1960s. We saw the price effects of inflation move from things like stocks to things like food and gold and oil. That process continued until the Volcker Fed finally ended it circa 1980. The monetary inflation was stopped and what was left of credit collapsed. Then the whole thing started over again. Credit recovered through the latter part of the 1980s, was pushed to even more grotesque extremes by the Greenspan Fed as it tried to keep the "fun" inflation (aka bull market prosperity) going, and now we are having monetary inflation at the same time as debt deflation, and here we are again enjoying "bad" inflation, etceteras …

See how this works?

http://users.zoominternet.net/~fwuthering/Posts/StockHMX.png

[Lukester]

Finster -

What happens when you get to the point where the global population, which is "accretive" in it's numbers over the centuries, arrives at the exponential inflexion point where it adds half a billion or one billion more souls in the space of 40-50 years? The world's carrying capacity never dealt with such an increment before.

What about when that happens after the world has spent two (increasingly mechanized) centuries picking it's most easily accessible mineral and natural resource deposits clean? What about when both of these events coincide with yet a third "inflexion point", wherein the unit cost of hydrocarbons extraction hits an "availability barrier" and can no longer fall again (ever) substantially?

It seems to me that the "fiat money vs. stuff" cycle you describe really can't continue as an unaltered paradigm in the face of these three "inflexion points"? This is the conceptual barrier, between the "it's different this time"ers, and the "it's never different this time"ers.

I would also observe this - your thesis is also iTulip's central thesis of "money vs. stuff" cycles. And it has a very large component of truth to it - maybe the major component. But iTulip has not essentially seen fit to "overhaul" this overarching thesis yet, and it's validity may be coming under increasing scrutiny in the next "very special" decade or two.

In every other respect, I must offer my compliments for the exceptional clarity of your illustration of the concept.

[WDCRob]

Lukester, at any point in the past you could make the same argument that "the population will expand dramatically." It's doubled many times previously in fact.

Of course this is the bacteria in a jar example that's been batted around here before - at some point the growth really IS too fast and resources are depleted so suddenly that there's a 'Collapse.' So you're probably right to argue that at some time in the future moves in oil and etc will be driven by diminished supply and increasing demand.

But, IMO anyhow, Finster has been very persuasive showing that up to this point the 'big moves' in commodities have in fact been monetarily driven.

That's something you've never addressed (unless I missed it).

I don't think the two ideas are mutually exclusive, just that as of today I think the burden of proof is on the peak oil folks to show that oil prices are NOT being driven by monetary issues. i.e. some sort of evidence that "it's different this time."

IIRC Finster's produced charts that suggest if we're currently in the early stages of peak oil, we've also started a period of peak wheat, peak gold, peak everything else tangible. So showing that oil isn't moving more or less in lockstep with a basket of other commodities would be a great start.

[Andreuccio]

Now at last we have a place where charts and graphs that depict these fundamental iTulip ideas are organized. For the topic at hand, Gold priced in major currencies. (http://www.itulip.com/forums/photoplog/index.php?n=24).

Nice resource, Fred. How does one access it, (aside from this link)? I looked on the Forums page (http://www.itulip.com/forums/index.php) but didn't see any mention of "photoplog".

[FRED]

Nice resource, Fred. How does one access it, (aside from this link)? I looked on the Forums page (http://www.itulip.com/forums/index.php) but didn't see any mention of "photoplog".

Just added as 6th item on the navigation bar after Members List. Enjoy!

[GRG55]

See how this works?

No I don't.

The big moves in everything require "easy money" montary policy.

The most recent examples of TMT Nasdaq stocks and the now departing housing bubble also required a monetary driver. So to imply that commodities are somehow "different" is illogical. Commodities are "different" only in our thinking that asset catagories deemed "necessities of life" should somehow be exempted not only from the results of the monetary authorities, but also deserve unique tax laws, government subsidies, and various regulations. Agriculture (in virtually every developed country) is the most egregious, but not the only, example of this. Energy is arguably right behind ag.

Monetary policy is a necessary, but not sufficient condition. It's not monetary policy in isolation that determines exactly what is going to be inflated in the next bubble cycle. There has to be a story, a belief system that forms, in order to really move the excess money and credit into a particular sector. The belief system always starts with a kernel of verifiable facts. Just like the productivity benefits of tech and the "shortages" due to the inability of homebuilders to quickly respond to in-migration in selected coastal areas, the inability of commodity producers to quickly raise production to meet the demand from such drivers as the global real estate & related infrastructure bubble is giving rise to "peak this" and "peak that". Voila. The factual basis for a budding new belief system.

If it was solely monetary policy that was responsible for asset bubbles then there would be no logical reason why the Fed couldn't use its all powerful monetary tool to maintain or immediately reinflate the most recent bubble asset catagory, thereby avoiding all the pain and suffering.

At some point in the future commodities, just as tech stocks and housing before, may see price increases that outrun the underlying rate of monetary growth. If that happens then we really will be in a commodity bubble. And you can bet I'll be depending on your eagle eyes (along with some of bart's charts) to confirm that warning. ;)

[Finster]

Finster -

What happens when you get to the point where the global population, which is "accretive" in it's numbers over the centuries, arrives at the exponential inflexion point where it adds half a billion or one billion more souls in the space of 40-50 years? The world's carrying capacity never dealt with such an increment before.

What about when that happens after the world has spent two (increasingly mechanized) centuries picking it's most easily accessible mineral and natural resource deposits clean? What about when both of these events coincide with yet a third "inflexion point", wherein the unit cost of hydrocarbons extraction hits an "availability barrier" and can no longer fall again (ever) substantially?

It seems to me that the "fiat money vs. stuff" cycle you describe really can't continue as an unaltered paradigm in the face of these three "inflexion points"? This is the conceptual barrier, between the "it's different this time"ers, and the "it's never different this time"ers.

I would also observe this - your thesis is also iTulip's central thesis of "money vs. stuff" cycles. And it has a very large component of truth to it - maybe the major component. But iTulip has not essentially seen fit to "overhaul" this overarching thesis yet, and it's validity may be coming under increasing scrutiny in the next "very special" decade or two.

In every other respect, I must offer my compliments for the exceptional clarity of your illustration of the concept.

Lukester, at any point in the past you could make the same argument that "the population will expand dramatically." It's doubled many times previously in fact.

Of course this is the bacteria in a jar example that's been batted around here before - at some point the growth really IS too fast and resources are depleted so suddenly that there's a 'Collapse.' So you're probably right to argue that at some time in the future moves in oil and etc will be driven by diminished supply and increasing demand.

But, IMO anyhow, Finster has been very persuasive showing that up to this point the 'big moves' in commodities have in fact been monetarily driven.

That's something you've never addressed (unless I missed it).

I don't think the two ideas are mutually exclusive, just that as of today I think the burden of proof is on the peak oil folks to show that oil prices are NOT being driven by monetary issues. i.e. some sort of evidence that "it's different this time."

IIRC Finster's produced charts that suggest if we're currently in the early stages of peak oil, we've also started a period of peak wheat, peak gold, peak everything else tangible. So showing that oil isn't moving more or less in lockstep with a basket of other commodities would be a great start.

Bull's eye, WDC.

Lukester, I think the crux of the apparent disagreement is that we are debating two different things. I'm not disagreeing with the notion that there is an essentially permanent population-based trend in relative basic natural resource scarcity. The math is irrefutable. The earth is finite. Each person's share of this finite earth is inversely proportional to the number of persons there are. Each 10% increase in global population is matched by a 10% decrease in the amount of earth available for each person.

I am saying that the commodity price effects of this trend have thus far been virtually undetectable amid the ones I cite above. Just as a rough indication of scale, a 10% change in population over perhaps decades pales against a 17% change in money supply in one year. We have price changes of several times over the course of a few years, first in one direction, then the other. Prices rose by orders of magnitude in the seventies, only to fall again after the Volcker Fed slammed on the monetary brakes. Then only to rise again after the Greenspan Fed slammed on the monetary accelerator.

Again, we have irrefutable math. The price of something is always a ratio; that of the value of the commodity in question to that of the value of the commodity we are pricing it in. Therefore, an increase in the price of physical commodities can just as easily be due to a decrease in the value of the monetary commodity as anything relating to the physical commodities themselves.

What confuses so many people is that they identify the value of something with its price. But no one here nor anywhere else that I have ever seen has ever quoted me a "value" of a barrel of oil in isolation. Without exception, the quote is always a price. The quote is always to the effect of X "dollars per barrel". A "wheat" quote might be Y "dollars per bushel". Pick another currency if you wish; you could quote cotton in Z "euros per bale". But note carefully: in no instance do we ever have a quote that omits some other commodity than the one whose "value" we purportedly are stating!

Consequently, we can draw no firm conclusion whatsoever about the value of a commodity from a statement of its price alone.

We can only state the relative change in value of two commodities, one which we tactitly and erroneously assume to be a fixed standard, but which itself is wildly variable.

A little thought experiment: Let the supply of money itself be fixed, just like the supply of fixed natural resources. In such a circumstance, we ought to expect that exactly the same forces that impact the value of fixed natural resources likewise affect the value of money. Thus, decades could pass and the population double while the prices of those natural resources remained fixed as well, right? This is not a policy recommendation, but it does serve to make clear that over time the price of natural resources depends solely on the relative supply and value of money.

[Jim Nickerson]

Just added as 6th item on the navigation bar after Members List. Enjoy!

Yes, and continuing to push New Posts and Quick links further off to the right, an inconvenience for those of us who have need to shrink our browsers to half-screen. Funny how this new photoblog jumped to top of list.

[Lukester]

Here's a reply to both GRG55 and Finster (above).

Clarification to Finster. You are explaining fiat money 'relativity' to someone who's already thoroughly accepted it. I actually agree with your thesis 100% in that regard. What I'm pointing out is that you are extrapolating it's relevance from the past 7 years commodity bull market and postulating into the next twenty years that 'we have no reason to believe' that real commodity prices rising above the inflation rate will be doing anything other than entering into a 'bubble'.

There I must flatly disagree with both you, and GRG55 (So you can proceed to tear my thesis to shreds, you guys. Have at it. :D )

... The belief system always starts with a kernel of verifiable facts. ... the inability of commodity producers to quickly raise production to meet the demand from such drivers as the ... giving rise to "peak this" and "peak that". Voila. The factual basis for a budding new belief system.

At some point in the future commodities, just as tech stocks and housing before, may see price increases that outrun the underlying rate of monetary growth. If that happens then we really will be in a commodity bubble. And you can bet I'll be depending on your eagle eyes (along with some of bart's charts) to confirm that warning. ;)

GRG55, you seem to be straining to adopt a rigorously "all agnostic, all the time" profile, describing every last commodity bull market as having to be essentially "only belief system, triggered by some kernel of fundamental factors".

I must disagree - you've got one third of the earth's population industrializing today - we've all seen those pictures posted to this website of the panoramic views of Shanghai, which look like the most extreme, high-rise portions of downtown NY or LA cloned out into a vast unending carpet of ultra-high-density dwellings and commercial space, extending for dozens and dozens of miles out to an invisible periphery in the smog.

Aren't these mega-cities sprouting up at the rate of dozens a year, each one almost as large as Chicago, somewhat awkward evidence that all this 'bubbly' commodities demand is getting manufactured into something quite real - accomodative of a very large multi-decade demographic trend?

Does the urban-employment trend in motion the past decade in Asia suddenly stop in it's tracks, or is the phenomenon so large as to predict it's own forward momentum for ten or twenty more years? What do the historical industrialising nation parallels suggest? What are the demographic projections of the move of rural Chinese, Indians and Southeast Asians generally over the next 20 years? Lots of 'spare capacity' rural dwellers still in that pipeline apparently, no?

We know this syndrome is fanning and replicating out from China and India across 1/3 of the world. I know, I know, whenever someone mentions 'China and India growth' the hard headed skeptics roll their eyes and think 'oh heavens, not the 'Chindia' card again"! But the awkward fact remains: China and India alone have a 'pipeline' of well over a billion rural dwellers waiting to enter into this industrialising demographic still to come.

Replicate that further throughout one third of the entire globe as rural economies industrialise and move into these mega-cities. So in this environment when we see commodities prices begin to outstrip the rate of inflation we 'know it's entering into bubble territory'?. I don't get the logic.

What part of 'global industrial build-out' without a parallel in history do you guys wish to ignore in your pursuit of rigorous ultra-agnosticism about 'peak-anything'?

WDCRob observes that while what I describe about the globe adding another five hundred million or a billion people in 20-40 years 'may be a viable issue in the future', he doesn't explain to me why in the face of the above build-out without parallel ( 20 or 40 new "Chicago's" springing up a year globally now?), this is not 'manifestly an issue right now.

Let's collect photos of all the "new Chicago's" built in the past five years, and we'll probably then conclude, looking at all this massively dispersed photographic evidence, that the burden of proof regarding future fundamental underpinnings of commodity prices should rather rest upon those who claim (not the past, but the immediate future!) commodities prices can and will only represent fiat money growth. If you conced they ever even will outstrip fiat paper money in real price, you immediately qualify that by saying such an outstripping immediately places those prices in bubble-land?

GRG55, I don't understand your logic - explain to me why, in the context of 1/3 of the world building more new cities in total acreage this decade than history has seen built in it's entire 3000 year in aggregate, you must inevitably conclude that when we see price increases outrun the rate of monetary growth, we'll then have to rationally conclude commodities consumption has entered the 'bubble phase'. Global infrastructure buildout is sucking up natural resources at the fastest rate in history - does this have any bearing on commodity prices eventually budging up past the inflation rate without entering bubble territory?

And why is the exponent rise of human souls from 6 to 7 billion in the next 50 years merely a 'corrolary factor'? Would this kind of raw number not rationally suggest it is a 'primary factor'? What's at all hypothetical about the permanent new demand load of another billion people sucking up resources? To call it conjectural with some basis in fact, we'd have to point to a similar demand load in the past which did not produce permanent supply stresses. But we don't have a comparable benchmark period in the past.

Commodities "must" enter into a "bubble" in this approaching environment?

You guys seem to wish to avoid any acknowledgement that massive new aggregate numbers, i.e. new fundamentals can ever put a big squeeze on commodities supply / demand - practically ever.

If you ever acknowledge in principle, that at some point commodities may rationally be expected to enter into a condition of supply stress in this kind of environment, then you are faced with the task of determining when that begins to look likely to occur. We look around, and must admit it is looking a bit 'likelier' these days - What keeps you two so sanguine that commodities supplies in the earth will meet all of this without any kind of crimp at the fundamental level? :)

[Finster]

Here's a reply to both GRG55 and Finster (above).

Clarification to Finster. You are explaining fiat money 'relativity' to someone who's already thoroughly accepted it. I actually agree with your thesis 100% in that regard. What I'm pointing out is that you are extrapolating it's relevance from the past 7 years commodity bull market and postulating into the next twenty years that 'we have no reason to believe' that real commodity prices rising above the inflation rate will be doing anything other than entering into a 'bubble'.

There I must flatly disagree with both you, and GRG55 (So you can proceed to tear my thesis to shreds, you guys. Have at it. :D )...

:D

Given the above, it's not exactly clear what disagreement remains! A murky point resides in what you refer to as "the inflation rate". If by that you mean the CPI or any variety of other official and widely published inflation measures, then I am more than glad to flatly state that I fully expect commodity prices to rise well in excess of such without qualifying as a bubble.

Part of this is because many of these measures have been statistically massaged into near-meaninglessness. Part of it is because they reflect domestic labor rates, which are likely to fall relative to the rest of the world's as the global labor arbitrage continues. And part of it - a big part of it - is because of the temporal displacement between money supply changes and commodity prices between different parts of the cycle.

This latter point was part of what I was driving at in my reply to GRG above in the discussion about the money and credit cycle. As asserted there, money supply changes in the early part of the cycle feed credit expansion and drive up asset (e.g. stock) prices, without much impact on commodity prices. But that doesn't mean the inflation just disappears altogether and never affects commodity prices at all. The financial system in effect serves as a reservoir, accumulating the price effects, only to release them later. During the credit contraction part of the cycle, this "stored up" price inflation gets released back into commodity prices even as effects of contemporary inflation begin to be felt. It doesn't literally work that way, but the result is as if it did, because the authorities are compensating for the contraction of the credit which would otherwise be undoing the asset price effects of the prior money growth. For an example of what happens when that compensation doesn't occur or is minimal, just look at 1929-1932. Regardless, the full accumulated effects of money supply expansion from the entire cycle - not just the part during which commodity prices are soaring - eventually is expressed in commodity prices.

So we got a certain amount of money growth that occurred in the 1980s & 1990s, we’ve gotten more since …and all of it - the accumulation of the entire cycle - is now being expressed in commodity prices now.

As a corollary to all this, we could have $5 oil if we wanted to. We'd just have to accept a Dow 500 along with it.

...

[Lukester]

I've been reading Mr. Leeb's newsletters since 1999. I've tracked most of his 'predictions' and found him to enjoy a very high batting average of correct calls. He called the housing bubble, chronic negative real interest rates, the commodity boom, gold, peak "cheap" oil, the massive industrialisation of 1/3 of the world creating a global disruption exceeding in scale any before it. He called America's FED boxing itself into a fiscal trap, which very likely precludes it from 'getting tough' on inflation again this entire cycle (for a decade?), due to acute systemic fragility - he called all the main points - back in 1999.

I trust his call on the commodities, gold and oil implicitly. I trusted my 'safe money' to this guy even when these calls were sounding a lot more outlandish than they are today. I trust him based on his batting average like to no-one else. In the excerpt below, I have the distinct impression he is not talking about fiat money inflated prices in commodities.

He's talking about commodities future 'real' prices, in today's dollars. In other words, what he's calling for, is a world where the natural resources component of every last service and essential trinket we believe we require to live with, will massively rise in price, continually, until our standard of living bears little resemblance to that which we enjoy today. No bubble - just lots of trouble.

[ P.S. Sorry to interrupt an interesting discussion between Finster and GRG55. My adding another POV seems to have 'terminated' that discussion ]


Dr. Stephen Leeb on Commodities (excerpt)

In the early ‘70s, we were drenched in what seemed an endless supply of vital commodities. Oil was $1.65 a barrel. Silver was $1.39 per ounce. Copper was just $48 per ton.

But back then there was only a mere 1.1 billion players on the industrial stage. Our energy needs were a mere fraction of what they are today. Industry was generating just a few trillion dollars for its 1.1 billion customers.

Today, is a very different pic­ture… one, few foresaw back then…

No one imagined that in little more than a generation, a popula­tion explosion, the collapse of communism and the rise of the Internet would change everything. No one imagined that these events would help the vast developing world leapfrog into the modern age, that capitalism would spread and dominate so far, so wide and so quickly…but that it would also bring great pains to the global economy…

Now we have 6 billion players all vying for the same relatively fixed supply of commodities. And within a single generation we’ll have another two. While we’ve begun to develop alternatives to these dirty industrial addictions, we should’ve started decades ago. But we never did. Why bother, when the Earth was awash with resources?

And now global industry is about to plunge headlong into its last great natural resource binge.

The Industrial Age’s Grand Finale

In the next 15 years, we will gobble up more of the Earth’s last remaining natural resources, than we did in any period in the past. This great natural resource binge will turn Wall Street on its head. Rising commodity prices will start to bear down on every aspect of our lives…from the costs of our tomatoes to the price we pay to heat and cool our homes…from the value of our blue chips to the income we receive on our CDs$2,700 gold. $9 gas. Plummeting indices. Soaring inflation. And plenty of bear markets.

But also expect a commodity bull market, the likes of which we have never before seen. It will dwarf every other that has ever come before it. Last century we had three commod­ity bull markets. They were from 1906-23, 1933-53 and 1968­ 82. Each one was bigger, and wreaked more havoc, than the one that came before it. This final one promises to outdo them all.

By the end of it, many things will be different.

Most paper assets will be shred­ded. Millions of American retirees will find themselves on the bread­line. Vital commodities like oil, gas, uranium, tungsten, cobalt, molybde­num will be greatly depleted. But almost all commodities whether abundant or not, will no longer be cheap. In fact, their costs will become so prohibitive, that it will finally force industry to seriously develop new alternatives, like renew­able fuels, and new industrial materi­als made from bio and nano-materi­als. But until that time comes, com­modities will rule the day.

[Mega]

Lets be honest, you guys post bar charts,pie charts, computer projections..........but its very simple..........everything is contected with the price of oil.

In 1963 3 silver dimes bought a gallon of gas, melt those dimes down today the silver would buy you.....a gallon of gas.

now WE know that a MEGA oil shortage is about to break, thus prices will spike, together with the $ in its death...........There is ONLY one way to go.

Mega

[GRG55]

Here's a reply to both GRG55 and Finster (above).

Clarification to Finster. You are explaining fiat money 'relativity' to someone who's already thoroughly accepted it. I actually agree with your thesis 100% in that regard. What I'm pointing out is that you are extrapolating it's relevance from the past 7 years commodity bull market and postulating into the next twenty years that 'we have no reason to believe' that real commodity prices rising above the inflation rate will be doing anything other than entering into a 'bubble'.

There I must flatly disagree with both you, and GRG55 (So you can proceed to tear my thesis to shreds, you guys. Have at it. :D )



GRG55, you seem to be straining to adopt a rigorously "all agnostic, all the time" profile, describing every last commodity bull market as having to be essentially "only belief system, triggered by some kernel of fundamental factors".

I must disagree - you've got one third of the earth's population industrializing today - we've all seen those pictures posted to this website of the panoramic views of Shanghai, which look like the most extreme, high-rise portions of downtown NY or LA cloned out into a vast unending carpet of ultra-high-density dwellings and commercial space, extending for dozens and dozens of miles out to an invisible periphery in the smog.

Aren't these mega-cities sprouting up at the rate of dozens a year, each one almost as large as Chicago, somewhat awkward evidence that all this 'bubbly' commodities demand is getting manufactured into something quite real - accomodative of a very large multi-decade demographic trend?

Does the urban-employment trend in motion the past decade in Asia suddenly stop in it's tracks, or is the phenomenon so large as to predict it's own forward momentum for ten or twenty more years? What do the historical industrialising nation parallels suggest? What are the demographic projections of the move of rural Chinese, Indians and Southeast Asians generally over the next 20 years? Lots of 'spare capacity' rural dwellers still in that pipeline apparently, no?

We know this syndrome is fanning and replicating out from China and India across 1/3 of the world. I know, I know, whenever someone mentions 'China and India growth' the hard headed skeptics roll their eyes and think 'oh heavens, not the 'Chindia' card again"! But the awkward fact remains: China and India alone have a 'pipeline' of well over a billion rural dwellers waiting to enter into this industrialising demographic still to come.

Replicate that further throughout one third of the entire globe as rural economies industrialise and move into these mega-cities. So in this environment when we see commodities prices begin to outstrip the rate of inflation we 'know it's entering into bubble territory'?. I don't get the logic.

What part of 'global industrial build-out' without a parallel in history do you guys wish to ignore in your pursuit of rigorous ultra-agnosticism about 'peak-anything'?

WDCRob observes that while what I describe about the globe adding another five hundred million or a billion people in 20-40 years 'may be a viable issue in the future', he doesn't explain to me why in the face of the above build-out without parallel ( 20 or 40 new "Chicago's" springing up a year globally now?), this is not 'manifestly an issue right now.

Let's collect photos of all the "new Chicago's" built in the past five years, and we'll probably then conclude, looking at all this massively dispersed photographic evidence, that the burden of proof regarding future fundamental underpinnings of commodity prices should rather rest upon those who claim (not the past, but the immediate future!) commodities prices can and will only represent fiat money growth. If you conced they ever even will outstrip fiat paper money in real price, you immediately qualify that by saying such an outstripping immediately places those prices in bubble-land?

GRG55, I don't understand your logic - explain to me why, in the context of 1/3 of the world building more new cities in total acreage this decade than history has seen built in it's entire 3000 year in aggregate, you must inevitably conclude that when we see price increases outrun the rate of monetary growth, we'll then have to rationally conclude commodities consumption has entered the 'bubble phase'. Global infrastructure buildout is sucking up natural resources at the fastest rate in history - does this have any bearing on commodity prices eventually budging up past the inflation rate without entering bubble territory?

And why is the exponent rise of human souls from 6 to 7 billion in the next 50 years merely a 'corrolary factor'? Would this kind of raw number not rationally suggest it is a 'primary factor'? What's at all hypothetical about the permanent new demand load of another billion people sucking up resources? To call it conjectural with some basis in fact, we'd have to point to a similar demand load in the past which did not produce permanent supply stresses. But we don't have a comparable benchmark period in the past.

Commodities "must" enter into a "bubble" in this approaching environment?

You guys seem to wish to avoid any acknowledgement that massive new aggregate numbers, i.e. new fundamentals can ever put a big squeeze on commodities supply / demand - practically ever.

If you ever acknowledge in principle, that at some point commodities may rationally be expected to enter into a condition of supply stress in this kind of environment, then you are faced with the task of determining when that begins to look likely to occur. We look around, and must admit it is looking a bit 'likelier' these days - What keeps you two so sanguine that commodities supplies in the earth will meet all of this without any kind of crimp at the fundamental level? :)

Lukester replied: "...GRG55, you seem to be straining to adopt a rigorously "all agnostic, all the time" profile, describing every last commodity bull market as having to be essentially "only belief system, triggered by some kernel of fundamental factors".

What follows that excerpt above makes for interesting reading.

I rest my case...

[Lukester]

... I rest my case ...

GRG55 -

Can you imagine us all in a 17th Century British courtroom arguing some obscure case, dressed in those high heeled boots, tight breeches, and powdered "perrukes", the white powdered wigs with the long rows of "hair-curlers", that draped down the front of one's dress coat?

"I rest my case M'lord" ... [ Imagine uncouth peasants with horrendous teeth grinning and scowling down from the spectator balconies, munching the seventeenth century equivalent of our popcorn - haggis, or fried offal, or whatever the hell they ate for snacks - yecch ].

Ah, that would have been a scene worth watching. I bet Finster would have had the longest "perruke-bangs" draped down the front of his dress coat - denoting seniority of course. Ah well - just daydreaming and woolgathering here. Sorry - I know this is all terribly silly of me. I'm degrading the quality of discussion on iTulip here. :)

[GRG55]

GRG55 -

Can you imagine us all in a 17th Century British courtroom arguing some obscure case, dressed in those high heeled boots, tight breeches, and powdered "perrukes", the white powdered wigs with the long rows of "hair-curlers", that draped down the front of one's dress coat?

"I rest my case M'lord" ... [ Imagine uncouth peasants with horrendous teeth grinning and scowling down from the spectator balconies, munching the seventeenth century equivalent of our popcorn - haggis, or fried offal, or whatever the hell they ate for snacks - yecch ].

Ah, that would have been a scene worth watching. I bet Finster would have had the longest "perruke-bangs" draped down the front of his dress coat - denoting seniority of course. Ah well - just daydreaming and woolgathering here. Sorry - I know this is all terribly silly of me. I'm degrading the quality of discussion on iTulip here. :)

http://www.starframers.com/catalog/263523.jpg

[Lukester]

Looks like the stuff they use to upholster cat clawing posts.


<TABLE borderColor=#990033 height=345 width="51%" bgColor=#990033 border=1><TBODY><TR><TD height=223>http://www.filibustercartoons.com/judges/col4.jpg
</TD><TD height=223>http://www.filibustercartoons.com/judges/col5.jpg</TD><TD height=223>http://www.filibustercartoons.com/judges/col6.jpg</TD></TR><TR bgColor=#660000><TD height=17>Zimbabwe
</TD><TD height=17>Hong Kong
</TD><TD height=17>New Zealand
</TD></TR></TBODY></TABLE>

[Andreuccio]

Yes, and continuing to push New Posts and Quick links further off to the right, an inconvenience for those of us who have need to shrink our browsers to half-screen. Funny how this new photoblog jumped to top of list.

Jim,

Just out of curiosity, why do you need to shrink your browser to half-screen?

[Jim Nickerson]

Jim,

Just out of curiosity, why do you need to shrink your browser to half-screen?

Because of watching my Schwab trading platform, a spreadsheet, and a multi-tab IE browser spread over two monitors, if I shrink the IE to half-=screen, I always have my Schwab watchlists up so that I see them. I read iTulip between times I might be downloading fresh data to my spread sheet or data from online.wsj.com to my spreadsheet. This works well reading iTulip as time allows. However, I keep having to scroll right to see and click the New Posts button, the most frequent one I use.

I think all the most frequently used menu items should be to the left of the menu bar, and in my estimate those would be New Posts, Quick Links, and Search. To me that is logical.

[BlackVoid]

What is really driving oil prices is this:
http://netoilexports.blogspot.com/

Net oil export has peaked in 2005. It is fundamentals.

BTW, gold production has peaked as well in 2001.

Monetary considerations are also valid, but the main issue is fundamentals.