Speculators, regional unrest and sovereign debt are driving up prices higher than ever in all commodity classes – food, oil, cotton, metals – and the global markets are once again beginning to heave and cast about, what inflation rising in emerging markets and shortages threatening to deplete all sorts of raw material resources. The question, as always, is not if the bubble will burst, but when?
Cycles come and go, as we know, and prices always have a way of returning to historical averages, but analysts are increasingly concerned that prices will never return to where they used to be. The finite quantities of natural resources simply cannot sustain an exploding human population and rapidly advancing standards of living in emerging economies. A couple recent articles gave an their takes on when the commodity bubble’s point of critical mass will cause it to explode.
Over at MarketWatch, Brett Arends mainly gives credence to GMO chairman Jeremy Grantham’s views, outlining a world of resource scarcity in his quarterly letter. Grantham predicted that if the agricultural sector has record-breaking crop yield next year (effectively producing a glut in supply), and if China’s own breakneck pace of growth backfires, there’s an 80 percent chance of “a commodities slump” next year. The copper price, for one, is up 50 percent in just under a year. Interestingly, Arends also points out that investors should keep an eye on more than just the metal (or oil, or cotton, or…) “Anyone who still wants to bet that commodities will rise further might take a look at the equities of commodity-related companies,” he writes. “Miner Freeport-McMoran trades on a modest nine times forecast earnings (recently down 0.26 percent), Chevron is just eight and a half times. And big gold mining companies look pretty cheap compared to gold itself. Barrick Gold (down 0.10 percent) is just eleven times forecast earnings.”
Meanwhile, writing on the Wall Street Journal’s The Source blog, Alen Mattich poke a little hole in Grantham’s (and Arends’) arguments. He posits that ingenuity is increasingly being translated into efficiency, especially in China and India, and that somehow ingenuity/efficiency will help global populations deal with the scarcity that’s looming. While certain degrees of innovation are positioning us to deal with the next century, the relative speed with which we’re mining copper, gold, zinc, and other metals to meet demand is alarming. Does ingenuity override absolute scarcity?
Perhaps speculators do account for the majority of a price increases, but no one can deny that the last decade has seen sustained rises that make it seem like there’s no turning back. The Barricks and Vales and Rio Tintos of the world are not letting up on acquisitions because they know that existing mines are drying up, and new mines must be secured and operations put on-stream. There is always a danger of excess metal lurking in the system, and recycled scrap can account for ever-greater percentages of finished product, but as for the current metal prices, one thing’s for sure: the escalator to the top floor reaches its destination sooner or later – then the belt goes back to the bottom.
By. Taras Berezowsky
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