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Commodities are a bubble!
Har!
People have no idea today how
cheap commodities are. Cheap, especially, when one considers that for extractive
commodities like the metals or petroleum, there is much less of them today
than there was forty years ago, in the mid-1960s, and many more people who
want to use them. In the 1960s, the industrializing world -- Europe, the US
and Japan -- had a population of about 700 million people. Today, the
industrializing world numbers more like two billion people, plus there is
another billion in the industrial world which is still using plenty of
commodities, plus, of course, there is less of the stuff left in the ground.
In practice, this means that the ore grade has been falling, and indeed the
2.0% copper ore grades of the 1960s have fallen to 0.70% today. This in turn
means that a miner has to mine, crush and process almost three times as much
rock for the same amount of copper. So, if copper use goes up 2x, and copper
grade falls by a factor of 3x, then the mining industry must mine and process
6x as much rock to deliver the goods. Modern mining methods have made this
possible, but for how long can it continue?
We'll start with the metals. I
compare metals values against the timeless benchmark of value, gold. Doing
so, we find that today's metals prices, even after doubling or tripling, are
still quite cheap compared to the levels they were in the 1960s. Generally
speaking, I think they can return at least to their 1960s average prices.
Probably they can go higher. The graphs only go to the end of 2003, but I
added today's latest prices in text.
Wake me up when the
value of 1000 lbs
of copper is 10 oz
of gold! Today, that would be $6.60 copper.
Zinc is already fairly close to its 1960s
levels.
Lead? Cheap!
I put aluminum in a separate
category, since the limiting factor in aluminum production is usually
electricity rather than ore availability. Still, it's way below its 1960s levels.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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