Casey Files:
The Bursting Commodities
Bubble
David Galland
Managing Director
Casey Research
BIG
GOLD
Jun 19, 2008
A steadily growing drumbeat
is sounding throughout financial mediadom; a major commodities
blowout is in the cards. The most widely quoted reason is a U.S.
recession that will sympathetically pop the commodity bubble.
It seems to me that these views
are intertwined with a changed perception of how the economy
works. A new paradigm if you will.
People used to pay homage to
the notion of a business cycle, a somewhat predictable and even
stately progression of economic growth leading to excess, followed
by a corrective recession. After which the cycle would begin
anew.
In today's bold new world,
however, most investment observers overlay onto the business
cycle a shifting series of rapidly rising - and falling - sector-focused
bubbles.
Because of their noticeable
size and influence, it seems to me that the bubbles can mask
the underlying business cycle to some extent. Case in point,
we all easily recall the dot.com bubble but have a harder time
recalling what the prevailing economic times were in the late
1990s. What came after the dot.com bust? Why, the housing bubble,
of course.
Of course, bubbles have always
occurred. But they appeared only periodically, every generation
or so. Prior to the dot.com bubble that heralded in this new
era, economic activity was more broadly distributed. When times
were good, the sectors that normally benefited, all benefited
in something of a range.
Today, however, while most
remain somewhat range bound, a single sector appears, Godzilla-like,
to cast a shadow over the broader financial landscape. It is
that sector that then receives the lion's share of the focus
and the investment flows, quickly becoming a self-fulfilling
prophecy.
Of late it has been the turn
of the commodities to stalk the land. And, if you believe the
pundits, it is time for the monster to be brought low. If not
by Mr. Market alone, then with the help of the regulators with
all their many WMDs (Weapons of Market Disruption).
Before commenting on whether
or not I believe they may succeed, a brief observation on the
origin of this new bubble era.
In my view, it is largely due
to the massive amount of money in various forms sloshing around
the globe, most of which emanates from the Quicky Print Fiat
Money Machines which have been reliably chugging away at
central banks around the globe for decades now.
One of the primary outcomes
of this odd chapter in monetary history is that the notion of
the value of money has been pretty much thrown out of the window...
though not one person in a thousand understands that the game
has changed.
For example, the Chinese are
correct in thinking their reserves include 1.4 trillion foreign
currency units, but that fact is increasingly disconnected from
any reliable measure of future value.
Underscoring the point, 1 trillion
U.S. dollar units set aside 5 years ago are today, adjusted for
inflation, worth just $620 billion. But who can say what those
1 trillion units will be worth five years hence?
While it would require far
more electro-ink than time allows for today, it is my contention
that the utility of the fiat monetary system is beginning to
fade. After all, at its core, the acceptance of unbacked money
is an act of faith.
And people are losing faith
in the fiat currency units they are being asked to accept in
exchange for their many labors, or in return for their tangible
assets -- and what is more tangible than commodities?
Back to the Bubble
So, are commodities merely
the latest bubble, a bubble now resting up against a pin? Or
is something else going on?
In my view, the explanation
hinges on the difference between, say, a dot.com fantasy company
run by a couple of twenty-somethings and, say, oil... the stuff
you use to get to work in the morning... or to assure the icicles
stay on the outside of your windows.
As much as you might enjoy
the software offered by your favorite dot.com, when push comes
to shove, you could probably manage without. Oil? Food? Good
luck.
To a lesser or greater degree,
the same acid test can be applied to the value-add of Bear Stearns
and the other financial stocks versus, say, the iron that supports
your local highway bridges. Or the copper that is so important
to all manner of electronics.
Or even houses and condos bought
on speculation by people who couldn't afford them versus the
nickel needed to create the stainless steel that is everywhere.
It is my simple contention
that while selected commodities can and will get ahead of themselves
(and probably already have)... the underpinning reality for their
higher prices has far more to do with the value of the currency
units they are priced in than with some broader investment fad.
To this date, I can count on one hand the number of friends of
mine outside of the business circles I run with who have made
any investments in commodities.
Add into the equation the clear
supply and demand challenges for many of the core commodities
and the bubble doesn't seem quite so bubbly.
Here's a picture of commodities
against both the U.S. dollar and the major currencies (ex-dollar).
And gold?
Well, while useful in certain
industrial applications, gold as a commodity has a unique utility
- it is considered as tangible money the world over. It is portable,
easily divisible, durable and unquestionably accepted around
the world. In an environment of a global crisis in confidence
in fiat money, gold will provide a critical function that will
only grow in importance in the months and years just ahead. [Editor's note:
Cast your weary eyes on this fine "H&S formation"
spectacle - '"Bearish"
on Gold
...LOL -Barb]
 In short, the occasional corrections
aside, this show is far from over.
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