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This week we update our
charts of commodities prices denominated not in the increasingly worthless
dollar, nor the euro, nor the yen, but in the supranational currency of mankind,
gold. Gold's value is basically stable over time, so prices denominated in
gold are "real" prices, as opposed to the "nominal"
prices denominated in floating (sinking) currencies. Also, you'll remember
from before that our charts only went up to December 2003. Now they're
updated to the latest month-end, November 2007. You'll see that there isn't
too much of a rise thus far, at least in historical terms. Most of the
nominal rise in commodities has been due to dollar devaluation. I think there
is potential -- by no means guaranteed -- that commodities might enjoy a
secular rise in real (gold) terms as well, leading to spectacular nominal
gains. This is already very clear in the case of crude oil. Grains/softs, in
particular, seem to have enormous upside potential, especially given recent
difficulties regarding the weather (on the supply side) and more meat/dairy
intensive diets in Asia (on the demand side).
February 24, 2007: The Real Prices
of Commodities 3: Bits n Pieces
February 17, 2007: The Real Prices
of Commodities 2: Grains
February 10, 2007: The Real Prices
of Commodities
Natural gas has been a junk
commodity for a long time. I think it will become quite a bit more valuable
in the near future, as North American natgas production is wheezing rather
badly. Warm winters and cool summers has kept a lid on demand for now, so
natgas is trading well below its heating-value parity with crude oil of about
6:1.
Indeed, in terms of btus,
natgas is the cheapest compared to crude since the early 1990s!
In real terms, crude still
hasn't gone up all that much. It's only about 30% higher than it was in the
crude-plentiful 1960s. It's cheaper than it was in 2000. I think it will go
much higher in gold terms, and probably much, much higher in dollar terms.
The grains are, actually,
still in the toilet. What if they crawl out of the toilet? They would go about
TEN TIMES higher in gold terms, and who knows -- twenty? thirty? -- times
higher in nominal terms. Lots of potential in grains.
Sugar is definitely in
the toilet.
Sugar is close to
hundred-year lows! Can you name another asset, anywhere in the
world, which is a) useful and important, b) publicly traded and liquid, and
c) at hundred year lows?
Copper is off its
historical lows, but it's not really up all that much. Could go higher.
Now, it should be said
that as monetary inflation increases nominal prices, faster than the increase
in nominal incomes, demand will tend to become impaired. Nobody can afford
it. Thus, the more monetary inflation there is, the less real/gold prices may
go up. This is part of the reason real/gold prices got so clobbered in the
1970s. However, we are starting to get to real production difficulties in a
number of commodities, notably the fossil fuels but also gold and the
agriculturals. We'll just have to see how it works out.
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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