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Talk of a new commodity super-cycle may be premature
Once GDP growth returns to trend, commodity demand will moderate
Fiscal and monetary relief are key to maintaining growth and demand
Structural changes in energy demand will prove more persistent

As the spectre of inflation begins to haunt economists, many market commentators have started to focus on commodity prices in an attempt to predict the likely direction of the general price level for goods and services. This indexing of the most heterogeneous asset class has always struck me as destined to disappoint. Commodity prices change in response to, often, small variation in supply or demand and the price of some commodities varies enormously from one geographic location to another. Occasionally the majority of commodities rise in tandem but more frequently they dance to their own peculiar tunes.

Commodity analysts tend to focus on Energy and Industrial Metals foremost; Agricultural Commodities, which are more diverse by nature are often left as a footnote. Occasionally, however, a demand-side event occurs which causes nearly all sectors to rise. The Covid-19 event was just such a shock, disrupting global supply-chains and consumer demand patterns simultaneously.

The chart below shows the CRB Index since 1995: –

Source: CRB, Yardeni

This chart looks very different to the energy heavy GSCI Index, which is weighted on the basis of liquidity and by the respective world production quantities of its underlying components: –

Source: S&P GSCI, Trading Economics

The small rebound on the chart above is not that insignificant, however, it equates to a 55% rise since the lows on 2020. The fact that prices collapsed, as the pandemic broke, and subsequently soared, as vaccines allowed economies to reopen, is hardly surprising. Economic cycles wield a powerful influence over commodity prices; short-term, inelastic, supply, confronted by an unexpected jump in demand, invariably precipitates sharp price increases.

…click on the above link to read the rest of the article…

New bull chart for $30,000 copper price: porphyries nearly mined out

May 15, 2021

New bull chart for $30,000 copper price: porphyries nearly mined out

New bull case for $30,000 copper price: porphyries nearly mined out

Bad moon rising over porphyry deposits. Radomiro Tomic, Chile. Image from Codelco.

Predictions for copper at double or triple today’s level is a fairly recent phenomenon – and bears still outnumber bulls as to what’s next for the bellwether metal.

Wall Street natural resource investment house Goehring & Rozencwajg Associates confirmed their place in the superbull camp this week, predicting a copper price north of $30,000:

“The previous copper bull market took place between 2001 and 2011 and saw prices rise seven-fold: from $0.60 to $4.62 per pound. The fundamentals today are even more bullish.

“We would not be surprised to see copper prices again advance a minimum of seven-fold before this bull market is over. Using $1.95 as our starting point, we expect copper prices to potentially peak near $15 per pound by the latter part of this decade.”

The rosy demand side for copper has been well documented and Goehring & Rozencwajg focuses on supply, specifically depletion in their latest commentary.

Depletion, surprisingly, is not discussed that often in the industry and according to the authors is little understood, despite its fundamental importance for long-term supply trends.

Low and declining grades, uninspiring green and brownfield discoveries (with a few exceptions) and thin, slow project pipelines have become rules of thumb in the copper mining industry.

To those issues, the report adds copper miners’ habit of high-grading (mining your best quality ore first) and growing your reserves with a simple ploy – lowering cut-off grades when prices rise.

Even with prices well above $10,000 a tonne, these paper reserves cannot keep growing, according to Goehring & Rozencwajg, specifically at porphyry deposits which produce 80% of the world’s copper.

…click on the above link to read the rest of the article…

Critical metals supply: Industry and government just couldn’t be that shortsighted, could they?

December 11, 2020

Critical metals supply: Industry and government just couldn’t be that shortsighted, could they?

In 2009 I had an email exchange with a reader in the computer industry in which he contended that the supply of two key metals in the electronics and solar energy industries, gallium and indium, just couldn’t be as precarious as I was claiming.

I bring this up because the European Commission put out a white paper earlier this year about the need for a plan to secure adequate supplies of critical metals including gallium and indium. This concern arises, in part, because these metals and several others are central in the manufacture of ubiquitous devices such as cellphones and renewable energy equipment such as solar cells.

In 2009 my reader made the following case which I summarized in a piece I wrote at the time:

He insists that indium simply can’t be that scarce because—get this—there is indium in billions of electronic devices including cellphones and computer screens, in fact, in nearly everything that has a flat-screen display associated with it.

This is curious logic. It says that because we are using a resource ubiquitously and at an exponentially increasing rate, it must be plentiful…

I realized later that what this computer professional actually meant was that the corporate and government planners charged with thinking about resource supply issues couldn’t possibly have made a colossal blunder which would lead to a catastrophic shortage of key metals in the electronics industry. He presumed, I think, that such an outcome was simply out of the question given the competence and intelligence of the people in his industry.

…click on the above link to read the rest of the article…

Overcapacity / Oversupply Everywhere: Massive Deflation Ahead

April 16, 2020

Overcapacity / Oversupply Everywhere: Massive Deflation Ahead

The price of a great many assets will crash, out of proportion to the decline in demand.

Oil is the poster child of the forces driving massive deflation: overcapacity / oversupply and a collapse in demand. Overcapacity / oversupply and a collapse in demand are not limited to the crude oil market; rather, they are the dominant realities in the global economy.

Yes, there are shortages in a few high-demand areas such as PPE (personal protective equipment), but across the entire spectrum of global supply and demand, there is nothing but a vast sea of overcapacity / oversupply and a systemic decline in demand as far as the eye can see.

Here’s a partial list of commodities that are in Overcapacity / oversupply:

1. Overvalued assets

2. Overpriced income streams (as income craters, so will the asset generating the income)

3. Labor: low-skill everywhere, high-skill in sectors experiencing systemic collapse in demand

4. AirBnB and other vacation rental properties

5. Overpriced flats, condos and houses

6. Overpriced rental apartments

7. Overpriced commercial office space

8. Overpriced retail space

9. Overpriced used vehicles

10. Overpriced collectibles

I think you get the idea.

Should China restart its export factories, then almost everything being manufactured will immediately be in oversupply, as the global export sector was plagued with mass overcapacity long before the Covid-19 pandemic crushed demand.

Incomes will crater as revenues and profits crash, small businesses close their doors, never to re-open, local governments tighten spending, and whatever competition still exists will relentlessly push the price of labor, goods and services lower.

Globalization has generated hyper-specialization in local and regional economies, stripping them of resilience. Fully exposed to the demand flows of a globalized class of consumers with surplus discretionary income, regions specialized in tourism, manufacturing, commodity mining, etc.

…click on the above link to read the rest of the article…

Is an Increase in Demand Key for Economic Growth?

January 11, 2019

IS AN INCREASE IN DEMAND KEY FOR ECONOMIC GROWTH?

Whenever the so-called economy shows signs of weakness most experts are of the view that what is required to prevent the economy sliding into recession is to boost the overall demand for goods and services.

If the private sector fails to increase its demand then it is the role of the government to fill this void.

Following the ideas of Keynes and Friedman, most experts associate economic growth with increases in the demand for goods and services.

Both Keynes and Friedman felt that the great depression of the 1930’s was due to an insufficiency in aggregate demand and thus the way to fix the problem was to boost aggregate demand.

For Keynes, this could be achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman on the other hand advocated that the Federal Reserve pump more money to revive demand.

There is however never such a thing as insufficient demand as such. We suggest that an individual’s demand is constrained by their ability to produce goods. The more goods that an individual can produce the more goods he can demand i.e. acquire.

Note that the production of one individual enables him to pay for the production of another individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).

Observe that demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.

In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require ie. consume.

…click on the above link to read the rest of the article…

All US Homes Are Overvalued

June 9, 2018

All US Homes Are Overvalued

Dorothea Lange Children and home of cotton workers at migratory camp in southern San Joaquin Valley, CA 1936

My long time pal Jesse Colombo, now at Real Investment Advice, recently linked on Twitter to a Zero Hedge article, which quoted CoreLogic as saying more than half of American homes are overvalued. CoreLogic calls itself “a leading provider of consumer, financial and property data, analytics and services to business and government.”

Well, CoreLogic is way off. All American homes are overvalued. How can we tell? It’s easy. It’s so easy it’s perhaps no wonder that people overlook the reasons why. But we all know them: The Fed has pushed some $20 trillion down the throats of the financial system. It has also lowered interest rates to near zero Kelvin. Then the government added a “relaxation” of lending standards and an upward tweak of credit scores. And Bob’s your uncle.

These measures haven’t influenced just half of US homes, they’ve hit every single one of them. Some more than others, not every bubble is as big as San Francisco’s, but the suggestion that nearly half of homes are not overvalued is simply misleading. It falsely suggests that if you buy a home in the ‘right’ place, you’ll be fine. You won’t be. The Washington-induced bubble will and must pop, and precious few homes will be ‘worth’ what they are ‘worth’ today.

Here’s what Jesse tweeted along with his link to the Zero Hedge article:

“Almost half of the US housing market is overvalued” – this is why U.S. household wealth is also overvalued/in an unsustainable bubble.

He followed up with:

U.S. household wealth is in a bubble thanks to Fed-inflated asset prices. This is creating a “wealth effect” that is helping to drive our spurious economic recovery. This economy is nothing but a sham. It’s smoke and mirrors. Wake the F up, everyone!!!

…click on the above link to read the rest of the article…

The Oil Curse Comes to Washington

April 27, 2018

The Oil Curse Comes to Washington

Prices rise and prices fall. So, too, they fall and rise. This is how the supply and demand sweet spot is continually discovered – and rediscovered.

When supply exceeds demand for a good or service, prices fall. Conversely, when demand exceeds supply, prices rise. Producers use the information communicated by changing prices to make business decisions. High demand and rising prices inform them to increase output. Excess supply and falling prices inform them to taper back production.

This, in basic terms, is how markets work to efficiently bring products and services to market. Five year plans, command and control pricing systems, and government price edicts cannot hold a candle to open market pricing. But not all markets are created equal. The market for gumballs or garbage bags, for instance, is much simpler than the market for solar panels or jet engines.

What we mean is some markets are subject to more government intervention than others; especially, if there’s a large money stream that can be extracted by government coercion. Sometimes governments nationalize an entire market – for the good of the people, of course.

Strange and peculiar price movements can indicate there’s something else besides natural supply and demand mechanics going on. On April 6, a barrel of West Texas Intermediate (WTI) grade crude oil cost about $62. Ten months ago, that same barrel of WTI oil cost about $43. About 24 months ago, it was only about $30 a barrel.

Yesterday, April 26, WTI oil was about $68 a barrel. What’s going on?

Price Fixing Accidents

Indeed, the oil market is subject to mass government interventions the world over. The push and pull of these hindrances to regular market determined price discovery can prompt wild price distortions. We don’t pretend to understand the many variables at play that influence the price of oil. Still, today, we scratch for clarity and edification, nonetheless.

…click on the above link to read the rest of the article…

Global Gold Investment Demand To Overwhelm Supply During Next Market Crash

November 13, 2017

Global Gold Investment Demand To Overwhelm Supply During Next Market Crash

When the next market crash occurs, global gold investment demand will likely overwhelm supply. When this occurs, we could finally see the gold price surpass its previous high of $1,900. Now, this isn’t mere speculation, as we already have seen this taking place in the past. When the broader markets crashed to the lows in Q1 2009 and the 10% correction in Q1 in 2016, these periods were to two highest quarters of Gold ETF investment demand.

I don’t really care on whether the physical gold is actually in the Gold ETF’s, rather I like to look at it as an important indicator that shows us how much investor fear there is in the market. Moreover, with the amount of leverage and debt now in the system, when the market crashes this time around, it will push gold investment demand up to a record we have never seen before.

The chart below shows the amount of physical global gold investment demand over the past 14 years. As the gold price increased, so did amount of gold bar and coin demand:

As we can see, during the U.S. Banking and Housing Market crash in 2008, gold bar and coin demand doubled to 868 metric tons (mt), up from 434 mt in 2007. That was quite a lot of gold bar and coin demand as it totaled nearly 28 million oz (1 metric ton = 32,150 oz). Furthermore, as the gold price jumped to $1,571 in 2011, gold bar and coin demand shot up to nearly 1,500 mt (48 million oz).

Now, the reason for the huge spike in physical gold investment in 2013 was due to the huge price smash as the gold price fell from nearly $1,700 in the beginning of the year to a low of $1,380 by the middle of April. Investors thought this was a huge sale on gold so demand for bars and coins reached a new record of 1,716 mt.

…click on the above link to read the rest of the article…

Carnage in US Natural Gas as Price Falls off the Chart

December 19, 2015

Carnage in US Natural Gas as Price Falls off the Chart

All eyes are on Chesapeake.

The price of natural gas in the US has gotten completely destroyed. The process started in July 2008, at over $13 per million Btu and continues through today, at $1.77 per million Btu.

In between, natural gas traded at prices that, for much of the time, didn’t allow drillers to recoup their investments, leading to permanently cash-flow negative operations, and now huge write-offs and losses, defaults, restructurings, and bankruptcies.

You’d think that this sort of financial misery would have caused investors to turn off the spigot, and for production to fall because drillers ran out of money before it got that far.

But no. Over the years, money kept flowing into the industry. In this Fed-designed world of zero interest rate policies, when risks no longer mattered, drillers were able to borrow new money from banks and bondholders and drill that money into the ground, and production soared, and more money poured into the industry based on Wall Street hoopla about this soaring production, and this money too has disappeared.

In the process, the US has become the largest natural gas producer in the world – and the place where the most money ever was destroyed drilling for natural gas.

But now the spigot is being turned off. And much of the industry is heading toward default and bankruptcy. Granted, the largest producer in the US, Exxon, has apparently bigger problems on its global worry list than the misery in US natural gas. Its stock is down only 25% since June 2014, and its credit rating is still AAA. But even if it gets downgraded a couple of notches, Exxon can still borrow new money to fund its operations, dividends, and stock buybacks, and service its existing debt.

But the rest of the industry – along with its investors and banks – is sinking deeper into fiasco.

…click on the above link to read the rest of the article…

Perfect storm heads for fossil fuel assets

November 27, 2015

Perfect storm heads for fossil fuel assets

A natural gas refinery next to a cemetery in New Mexico, US. Image: Christina Xu via Flickr

Coal, oil and gas sectors warned that trillions of dollars of assets could be stranded if a global agreement on limiting climate change is reached at the UN summit in Paris.

LONDON, 25 November, 2015 – The fossil fuel industry may waste as much as US$2.2 trillion (£1.45 tn) in the next decade if it persists in pursuing projects that prove uneconomic in a world beginning to turn its back on carbon.

An independent thinktank, the Carbon Tracker Initiative (CTI), says the industry faces “a perfect storm” of factors, including international action to limit global average temperatures to 2˚C above their pre-industrial level, and rapid advances in clean technologies.

The CTI report says there will be no need for new coal mines, oil demand will peak around 2020, and growth in gas will disappoint industry expectations if world leaders agree and then implement the policies needed to meet the UN commitment to keep climate change below 2˚C − the threshold agreed by most governments.

Next week’s UN climate change conference in Paris will be trying to reach such a global agreement.

Excess of supply

The report warns: “If the industry misreads future demand by underestimating technology and policy advances, this can lead to an excess of supply and create stranded assets. This is where shareholders should be concerned.”

James Leaton, CTI’s head of research and co-author of the report, says: “Too few energy companies recognise that they will need to reduce supply of their carbon-intensive products to avoid pushing us beyond the internationally-recognised carbon budget.

“Clean technology and climate policy are already reducing fossil fuel demand. Misreading these trends will destroy shareholder value. Companies need to apply 2˚C stress tests to their business models now.”

…click on the above link to read the rest of the article…

America Waiting to Explode: “If Supply Lines Go Down… Millions of FDA-Approved Drug Addicts Go Psycho”

October 22, 2015

America Waiting to Explode: “If Supply Lines Go Down… Millions of FDA-Approved Drug Addicts Go Psycho”

zombies-smell-food

How bad can things get?

Preppers know the scenarios – any major crisis from economic breakdown, to civil unrest and riots, an EMP, natural disaster or plain out martial law can bring things to a halt with shocking quickness. And chaos is nearly always the end result.

But this article examines just how far America has fallen into desperation. The closer that the nation spirals towards disintegration, the worse things seem to get.

Between the extremely vulnerable economic system and looming financial crisis, the decline of American values and morality and the utter dependence of Americans upon centralized supply chains, the feds and corporations for everything, the United States population stands all-too-close to disaster. Sam Gerrans at RT says that America is a bomb waiting to explode:

The United States is in decline. While not all major shocks to the system will be devastating, when the right one comes along, the outcome may be dramatic.

We can see how fragile the U.S. is now by considering just four tendencies.

1. Destruction of farms and reliable food source

2. Weak economic system

3. Americans increasingly on mind-altering drugs

4. Morals in decline

According to Gerran’s numbers, less than 5 million people are in a position to feed themselves with the SHTF. With preppers and backyard homesteaders, that number is hopefully much higher, but in any case, it still leaves well over 95% of the population utterly dependent on the grocery store or the government – and the shelves will empty out of literally every store within hours if a real crisis hits.

The average American might have three days of food in their pantry – but that still puts collapse and disorder on a schedule of nearly immediate:

…click on the above link to read the rest of the article…

The Boundaries and Future of Solution Space – Part 3

August 17, 2015

The Boundaries and Future of Solution Space – Part 3

Energy – Demand Collapse Followed by Supply Collapse

As we have noted many times, energy is the master resource, and has been the primary driver of an expansion dating back to the beginning of the industrial revolution. In fossil fuels humanity discovered the ‘holy grail’ of energy sources – highly concentrated, reasonably easy to obtain, transportable and processable into many useful forms. Without this discovery, it is unlikely that any human empire would have exceeded the scale and technological sophistication of Rome at its height, but with it we incrementally developed the capacity to reach for the stars along an exponential growth curve.

We increased production year after year, developed uses for our energy surplus, and then embedded layer upon successive layer of structural dependency on those uses within our societies. We were living in an era of a most unusual circumstance – energy surplus on an unprecedented scale. We have come to think this is normal as it has been our experience for our whole lives, and we therefore take it for granted, but it is a profoundly anomalous and temporary state of affairs.

We have arguably reached peak production, despite a great deal of propaganda to the contrary. We still rely on the giant oil fields discovered decades ago for the majority of the oil we use today, but these fields are reaching the end of their lives and new discoveries are very small in comparison. We are producing from previous finds on a grand scale, but failing to replace them, not through lack of effort, but from a fundamental lack of availability. Our dependence on oil in particular is tremendous, given that it underpins both the structure and function of industrial society in a myriad different ways.

…click on the above link to read the rest of the article…

Drilling Efficiency To Keep Oil Prices Low

May 24, 2015

Drilling Efficiency To Keep Oil Prices Low

Economics 101 tells us that prices in a free market are set by the interaction of supply and demand. The world oil markets have gotten a graphic lesson in that truth over the last year, as the dramatic surge in US oil production has met stagnant demand. This, in turn, has pushed down spot prices by nearly half.

The recent uptick in oil prices, however, has buoyed hopes among market watchers that a strong oil price rally is in order. Unfortunately economics is working against these investors.

Gasoline demand is starting to rise as prices have reached multiyear lows. As it continues to rise, motorists around the world will begin to suck up extra all of that extra supply. That would normally lead to a strong rebound in prices.

But unlike the 2008 fall in oil prices, which was driven by a collapse in demand across the industry, the current price quandary is supply based. And the massive expansion in supply is overwhelming the newfound demand. That may make it more difficult for prices to bounce back.

Over the past few years exploration companies have unlocked extraordinary new unconventional resources like the Alberta oil sands and US shale, leading to a historic increase in supply. More impressive is the fact that even at today’s low prices, there is likely to be some small production increase in 2015.

…click on the above link to read the rest of the article…

Why the Hysteria Over Oil Prices Is Overblown

January 23, 2015

Why the Hysteria Over Oil Prices Is Overblown

Wild stormy weather stops us in our tracks. Factories close. Offices are abandoned. School is cancelled. After the rush to stock up, stores are shuttered. And when the storm hits, it’s all we can think about — especially if the power goes out.

It can seem like an eternity, and can obliterate any pre-storm memory. This sounds eerily similar to the oil price tempest we are in the middle of right now. Today’s price seems like the only reality, except that the plunge is still on. Are we going to survive this thing? Can we ever expect a return to calm?

Dial in to the news, and you’d be tempted to think not. It’s natural that storms bring about their own brand of myopia, but that’s when experience should make us wiser. And we all have a lot of that to draw on. We only have to rewind back to 2008 to see a very similar situation to today’s. Back then, oil prices slid from well over $100 per barrel at the peak to $40 at the trough, all in about five months. Currently, prices are tumbling from just over $100 to just over $40 over a six-month span. Just eyeballing the raw data, the similarity is staggering. So are other key features.

Both episodes were preceded by positive predictions. Back in 2008, fears that we were running out of oil led to very believable predictions of imminent $200 per barrel crude. Supply constraints in the 1970s led to very similar longer-term predictions. In today’s case, predictions weren’t as wild, but in general forecasters preferred to believe that a return to global growth would keep prices in the triple-digit zone. Funny how diametrically wrong pundits can be, even with a wealth of instructive recent experience.

…click on the above link to read the rest of the article…

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