How much further can commodities run?

Our calvalcade of Oil continues. I like the approach of the newsletter "Sound Advice" on the commodity boom, as quoted by Peter Brimelow:

"Beyond the mismatch between supply and demand, we think commodities have further to go simply because so many persist in treating ever higher prices as a transient phenomenon.

You’ll remember Alan Greenspan always pooh-poohed the persistence of higher energy prices — until he acknowledged them. Today, 20 years of declining energy prices have convinced most investors that rocketing gold an silver prices are also a transient aberration, and must collapse.

If we are correct that gold, silver (and all commodities) fell to ridiculous levels at the start of the new millennium primarily because the world came to forget inflation, it makes sense to us that as inflation stirs today, commodity prices should jump. We’re not picking any particular price, just noting profitable pessimism."

That thesis — over 20 years of declining energy prices lulling investors into a stupor — seems to be built into the blase attitude regarding recent Oil prices. Yesterday, the price of crude rose to over $74 intraday on
geopolitical tensions and suppliers struggling to keep up with demand. 

We can see support for that "investors are lulled" in the following graph, via Chart of the Day:


The attitude seems to be "This too will pass." We have had too good for too long, and apparently taken it for granted. Hence, why high oil prices may be looked at as mere transitory phenomenon.

And with oil prices rising, Iran escalating, and Iraq seemingly decaying before our eyes, its no surprise that (despite the big inventory build), gasoline prices are up too. COTD notes "over the last seven weeks, the average US price for a gallon of unleaded has shot up 52 cents per gallon. When adjusted for inflation, gasoline prices are not far off the inflation-adjusted peak of $3.18 that occurred back in 1981."

This won’t matter — until it does.


UPDATE April 21, 2006 2:26pm

I said this won’t matter until it does. Well, it looks like it just did. Oil at over $75 a barrel, and it tanked the market — Dow went from up $40 to down 25, witht he Nasdaq off more than 26 (1% ).


Petrobulls’ profitable pessimism
Peter Brimelow
MarketWatch, 3:31 PM ET Apr 20, 2006

Gasoline prices (inflation-adjusted)
Chart of the Day
Apr 21, 2006

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  1. blue][erring commented on Apr 21

    my operating assumption is that the oil ETF is contributing to the jump in oil. holding silver (it’s heavy!) for 9 months for the silver ETF.

  2. blue][erring commented on Apr 21

    also, in nominal dollars yes we are reaching a gasoline high… but in 1980 dollars, not so much. more important on that graph is the move from $1.50 to $3.00 in a short period of time.

  3. PigInZen commented on Apr 21

    Might I note, in regards to gasoline, that the peak demand period is rapidly approaching. I can only venture to guess what the top will be for oil futures in July. I’m not a commodities trader (thank ye Gods), I’m an armchair observer (meaning my observation is novice level) but even this observer can tell that sustained higher levels in the price of gasoline spells bad trouble for this economy. Considering the productivity gains made from just-in-time inventory systems over the past 20 years what will happen when that model is no longer economically viable?

  4. thecynic commented on Apr 21

    it seems like it is a cost of carry issue.. with negative interest rates for 2 years it was free to own commodities. are interest rates still negative? depends on how you measure inflation. a rise in real interest rates will cool commodity prices as it will become less attractive to own. i would argue that despite the fed’s tightening campaign, interest rates could still be negative and that’s what the price action in commodities is telling us. it also tells us the Fed has more work to do and if they stop tightening commodities could run much further. then the key will be how bond market and dollar react.

  5. Alaskan Pete commented on Apr 21

    For all things oil and petrol markets, I recommend checking out

    They are peak-oilers.
    Very knowledgable folks running the show over there, and many of the commenters are “in the biz” so to speak, from an anonymous CEO of a wildcatter to engineers and upstream/downstream operators. I learned more about coking and the refining in one day than I would ever learn reading WSJ, NYT etc.

  6. Mark commented on Apr 21

    Alaskan Pete-

    But if you wanted to know about “coking”, you could just have asked….

    Oh yeah, we’re dropping that. :)

  7. B commented on Apr 21

    The gold ETF definitely helped spur the price of gold because the market is so small comparatively. The oil ETF, no matter how large it gets it super small comparative to the global oil market. The oil market is gigantous and the ETF simply is a pimple. Now the silver ETF will really be an illiquid market where the speculators can roam. Remember, the Hunt brothers almost cornered the silver market. The ETF will be a wild ride.

    I appreciate Peter Brimelow’s journalism but I have a question for him if he reads this blog. Can he show me any time in history where commodities have run like this for alot longer than they have already run? Since 1900 the answer is no. What he fails to take into consideration is economics 101. If basic materials increase at 300-1000%, how long does that take to crush demand? It historically hasn’t taken more than one business cycle. You simply cannot have prices increase by such tremendous amounts and not see a profit recession, a real recession or an induced slow down by consumers going on strike.

    What is likely true this cycle is the world’s developing nations have much more primitive economies that are affected much more than ours. So, they have likely already been hurt much more than us. Thus, if we don’t keep buying……………How will the developing world’s consumer be able to pay for these prices? Frankly, I don’t think it matters whether we are buying or not. Remember, was it Indonesian or Malaysian citizens that went on a rioting rampage because oil prices went so high last year and the government was no longer going to subsidize pricing. When you make $2 or $50 a day, how the hell do you pay for these increases? And in commie China, where they must continue building at 8% plus just to keep the economy from shrinking, how are the 900 million people living on a dollar a day going to pay for this? I don’t know when and I don’t know how, but I do know China is a freakin ticking time bomb.

    If you believe the world is in a global real estate bubble, you must believe by reasonable deduction we are in a global commodities bubble. The overconsumption of one asset causes the other asset to follow by simple rules of supply and demand.

  8. Alaskan Pete commented on Apr 21

    Mark, you’re killin me. Must resist temptation. No more rip snorting rants against Kudblow…um, that didn’t sound right, let me try again…no more railing on Larry Lines…dammit, that sounds bad too. Ok, I’ll just shut up now.

  9. Alaskan Pete commented on Apr 21

    B, I’m with you on oil, but not commodities in general. Sure, copper is on a parabolic blow off with US housing slowing, not a good scenario. But you can’t analyze the prices from a single perspective. If say aluminum was up 100% in USD terms over 3 years, but the USD slid 40% against the home currency….you see where I’m going with this.

    Then take a look at global monetary creation rates(inflation). For example:

    Australia + 8.1%
    Britain +12.2%
    Canada +6.4%
    Denmark +24.0%
    US +8.0%
    Euro area +8.0%

    (source: Puru Saxena)

  10. B commented on Apr 21

    I guess it it comes down to a few things.

    Something potentially telling happened yesterday. The dollar soared and commodities crumbled. What extraneously happened to cause this? Expirations? Something else? Is a weak dollar causing an inflationary environment or is an inflationary environment causing a weak dollar. ie, I wonder how big of a bet is made long hard assets and short the dollar which, when it no longer works, will relieve the dollar’s malaise. People believe it is the other way around. But, yesterday’s market actions do not support that thesis. Just an observation that big, big money is driving this asset boom, not supply and demand from the end user.

    You know, common sense says a weakening dollar will continue to prop up commodities. But, eventually, market demand will determine long term pricing. So, regardless of what the Fed does or regardless of what the dollar does, commodities will collapse based on free market dynamics at some point. Ditto with housing, ditto with equity bubbles, ditto, ditto, ditto. That is, unless we don’t operate in free markets based on supply and demand.

    Now, if I am to believe your thesis, everything that has happened over the last one hundred years of behavioral economics and supply/demand is different this time. Why should I believe that? What is your thesis that it’s different this time. The laws of free markets are no longer working? Business cycles magically changed? I have the copper chart from 1900 till today. It always ends ugly and it never lasts as long as people think.

    For C*rist’s sake, Jim Jubak has an article out that is titled Peak Metals. Iron ore and copper are harder to find. Are you f*cking kidding me? That is the most frigging assinine thing I have ever heard. He sounds like Alan Greenspan or Jim Cramer in 2000. I guess that logic also applies to coal because it is up so much. America has a 500 year supply of coal that we know about. So does China. And any retard with a shovel can mine it right off of the surface. Iron ore and copper is really little different other than it is typically strip mined as some coal is. Why the hell are coal prices up so much?

    I’m curious as to your argument. I like to hear stimulating positions other than mine. But, please tell me it is something other than supply problems. That is horse manure that I bought in the early 90s when I was screwed into buying some copper futures contracts because mines were down, there were strikes, we were short inventory, etc. Do you have any historical precedence, well laid out economic theory or some other sorts?

    I don’t know if this is the exact top but I can assure you we will have one hell of a messy problem at some point. Phelps Dodge, at an all time high, is flashing sell on my secret sauce charts. May change but that is nearly unheard of.

  11. angela commented on Apr 21

    My guess is that some commodities are headed for a “secular bull,” but that doesn’t rule out “corrections” in the short term.

  12. jkw commented on Apr 21

    Today while I was getting lunch the news had a segment about how pawn shop business is climbing as people try to find some way to pay for gas. They didn’t give a number for the whole country, but one pawn shop in rural Georgia said their business has grown over 30% in the past year, mostly from people trying to get money for gas.

    It’s just anecdotal, but it looks like the US economy is going to start faltering if gas prices don’t come down. Pawn shops only do well after the business cycle has peaked. Continued high oil prices will cause a recession, which should drive stocks down.

  13. Mark commented on Apr 21


  14. thecynic commented on Apr 21

    i’m in your camp on what’s driving the commodity price action, but isn’ t being long oil or gold or whatever the same as being short the dollar? in other words these hedge funds are borrowing dollars to buy commodities. you are right when they puke em it could reverse the dollar’s demise, but i would pose two questions/points.
    1) are commodities forecasting a weaker dollar in the future or are they alligned? the dollar has not weakened on a % basis compared to the asset market’s gain.. it’s possible that this recent run up in commodities is in anticipation of further dollar weakness….
    2) if we do have an unwind of this reflation trade and history is any indicator wont’ the Fed aggressively ease to stop the bloodshed? you’re right once the process is in motion, all cards fall. that means global stock markets as well.. i would think that the fx market would err on the side of an easy fed and continue to shy away from the dollar but i don’t know where you go. who has the most conservative central bank?

    it’s really pretty scary because the whole global asset market has been reflated by this easy money and it could domino. i kinda wonder if the natural gas mkt, saudi stock mkt, brazil and silver are the shoes dropping one by one.. it seems like the writing is on the wall..

  15. jim commented on Apr 21

    Greenspan created this monster and now he is out on the lecture circuit knocking down 500 grand a speech like he is some kind of GD hero. I don’t get it. Tar and feathers would be more appropriate. Maybe I am missing something.

  16. Bastiat commented on Apr 21


    My guess is that some commodities are headed for a “secular bull,” but that doesn’t rule out “corrections” in the short term.

    It’s is an interesting concept, but I don’t think commodities have ever had a secular periods, bear or bull. Have they?

    This idea reminds me of the Simon / Erhlich bet.

    “I and my colleagues, John P. Holdren (University of California, Berkeley) and John Harte (Lawrence Berkeley Laboratory), jointly accept Simon’s astonishing offer before other greedy people jump in.”

    Ehrlich and his colleagues picked five metals that they thought would undergo big price rises: chromium, copper, nickel, tin, and tungsten. Then, on paper, they bought $200 worth of each, for a total bet of $1,000, using the prices on September 29, 1980, as an index. They designated September 29, 1990, 10 years hence, as the payoff date. If the inflation-adjusted prices of the various metals rose in the interim, Simon would pay Ehrlich the combined difference; if the prices fell, Ehrlich et alia would pay Simon.

    Then they sat back and waited.

    I highly suggest reading the rest of the article during the weekend. Simon was one of the greatest contrarians outside the financial world.

    Here’s a quote for our resident cynics, dyspeptics, and other doom-mongers:

    For some reason he could never comprehend, people were inclined to believe the very worst about anything and everything; they were immune to contrary evidence just as if they’d been medically vaccinated against the force of fact. Furthermore, there seemed to be a bizarre reverse-Cassandra effect operating in the universe: whereas the mythical Cassandra spoke the awful truth and was not believed, these days “experts” spoke awful falsehoods, and they were believed. Repeatedly being wrong actually seemed to be an advantage, conferring some sort of puzzling magic glow upon the speaker.

  17. B commented on Apr 21

    That article is one of the best go*damn articles referenced on this board. I’ll read the whole thing later. And, it points out my favorite idiot, Thomas Malthus. The blockhead who said we would all starve to death because he thought trends lasted forever. (Btw, that was about 300 years ago to show you how human behavior never changes.)

    Cynic, I’m with you on the worry end of where this will all end. But, the last time, when the S&P PE was almost exactly the same as today and this happened it was 1974. It was post 1968, the second biggest equity bubble of the time behind 1929. It was the first bull cycle post that equity bubble just like today. Copper had the second biggest explosion ONLY to today. Gold was exploding. We had low interest rates post an equity blow off we were transitioning to a long cycle higher rate environment just as we are today. The cycle was driven by hard assets and a weak dollar just like today. (Actually a dollar crisis) America and the world was very protectionist as Japan was killing us even more than China today. We had a housing bubble off of low rates as money transferred out of overvalued equities. We were in the midst of a war. We had blue collar misery and a separation of the haves and have nots as jobs were lost to overseas companies. We had protectionists calling to shut off our borders. We had an auto industry crisis as the Big Four were caught with their pants down. We actually had one Congressman say we should have finished off Japan and bombed them into oblivion. Nice. Sounds like Charles Schumer’s cousin. We had oil booming and crisis in the Middle East. We had a Yen/Dollar exchange rate that was 400% more beneficial to Japan than today just like the Chinese Yuan. And on and on and on. America was in deep crisis.

    But, I must say, it’s different this time. It’s different in one respect. Not human behavior. Jubak’s peak metals is just the last of off the freaking charts. What is different is derivatives. mortgage backed securities, leverage. 2+ trillion in credit derivatives on GM and Ford alone. Oh, and did I say LEVERAGE. That’s what is different. So, now we really have the making of a serious friggin mess. Yeah, like you, I do worry we are really going to choke down a serious mess.

    By the way, for those long all of these assets, gold fell 50%, oil collapsed, copper fell to pre-bubble levels, commodities collapsed and the S&P fell 50%. That’s about an 80% Nas correction. That was the second correction after the equities bubble. Jim Cramer tell you that when he tells you to buy metals after a 500% run? Jim Jubak tell you that in his peak metals article? What you should be doing is waiting for the opportunity that will be a tremendous chance to buy technology. Technology will ROCK the next cycle because the excess capex in the late 90s will be worked off finally. And America will re-emerge as the totally dominant global power it always has been and will be for the indefinite future. 1974 was the best buying opportunity for stocks in decades. I don’t think we are headed for anything that serious but the PE on the S&P was exactly as it is today so when blockheads say the market is cheap, the are oh so wrong. Markets go from bubbles to the opposite extreme historically before bouncing back. That means we have a real chance of seeing single digit PEs before we see an expansion.

    LASTLY, WE HAD A YOUNG ALAN GREENSPAN SAY HOW IT WAS HARD NOT TO BE UBER BULLISH ON AMERICA’S FUTURE WHEN HE WAS HEAD OF TOWNSEND GREENSPAN right before the S&P cratered in 1973. You remember him? The same guy who said we had reached Pax Americana in 2000 and it would never end.

    90% of what you read is total bullshit. It’s plausible bullshit but it’s still bullshit. May you live in interesting times. Time to go enjoy the weekend.

  18. Detroit Dan commented on Apr 21

    I can think of a few Cassandras who have been right in recent years:

    • Those predicting a dot com crash.
    • Those predicting that the Iraq War would be a disaster.
    • Those noting that New Orleans is quite vulnerable to a hurricane.
  19. Larry Nusbaum, Scottsdale commented on Apr 21

    The 30 year year inflation, which began in 2001, repeats itself every 30 years. Compare the events that took place in 1911, 1941, 1971 and 2001. We are now halfway through this cycle and the worst part of the inflation is yet to come.
    In 2002, the CRB chart showed a bottom in October 2001 and how that compares with 1971. The CRB Index has now gone above the 1980 resistance level. (In 1976 there was a steep correction)
    China and India have become global monster, buying up natural resources on every continent.
    The Fed continues to raise rates at each meeting while printing money in the basement 24/7 (the money supply grew by 10.3% in 2005 – the real inflation rate)

  20. Mark commented on Apr 21


    If memory serves me correctly, the only people who made money during the 70s were the sector players and they made it in oil, gold, and commodities. Yes there were vicious corrections and that 50% haircut in gold was a doozie but it roared on engufing anything in its way until hitting $850. Now I am not a gold bug but Bernanke’s conundrum insists that he choose the path of inflation and that means higher gold, oil and commodities until their run finally ends. When they were done last time, energy made up nearly 30% of the S&P by weight. Nothing approaching that has to happen here but you can already tell that energy is providing a disproportionate amount of earnings to the average so the trend is underway. The next step is multiple expansion. Then inclusion of more and more energy companies as other multiples contract as they are choked for profits and the S&P tries to find a way to keep the numbers up. Of course history does not have to repeat. But it does rhyme.

  21. mike commented on Apr 22

    My sight has some good info on trading thought you might like it.


  22. B commented on Apr 22

    The only people who made money in the 70s were market timers. Not commodities players who were pulverized many times, not growth players not anyone other than timers. Oh, and maybe value players held their own due to much higher compounded dividends than we have now. ie, Doing what Barry is telling you to do is the only thing that made money.

    Yes, gold recovered after that haircut. YEARS later. Copper, eh, sorry. Gold recovered for extraneous macroeconomic reasons that may never happen again. How may other times in the past 100 years have you seen short rates go to 22%? How about never. That was the ONLY REASON why gold went to $850. And guess what happened when the mighty force of Paul Volcker hammered inflation? Gold did what it always does. Cratered. Not because commodities had this concept of a secular bull people are talking about. That has no precedence. That is a paradox. Secular pricing bull in a commodity? Huh? Now, I guess it wouldn’t be a commodity then would it? Maybe iron ore is now a precious metal.

    Everyone obviously does whatever they want to do. I’m simply pointing out the falsehood in notions that are being thrown around right now by nearly everyone. There is a first time for everything just like rates going to 22%. But, history is not on your side. And, if there is one thing I have studied thousands of hours, it is the historical intermarket relationship, supply/demand characteristics, behavioral economics and pricing action of markets over the last 100 years. I may not always be right but I will know that history, and therefore human behavior – the unwaivering constant – , is on my side.

  23. Mark commented on Apr 22


    I am an avid reader and appreciate other perspectives. Would you share a couple of sources (books) on what you describe as the “historical intermarket relationship, supply/demand characteristics, behavioral economics and pricing action of markets” that you find most persuasive? And no I am not being facetious.

  24. Ned commented on Apr 23

    good posts everyone. great for reading with my coffee this morning. my two cents is that unlike the 70’s (due to demographics and derivatives, among other things) the US will not bounce back to the top. Power is moving East and if China can avoid a revolution then China and India and others will see living standards go up while ours fall. FWIW. Just hope some millionaire in Singapore wants to buy my house when I am ready to retire…

  25. jlj commented on Apr 23

    Mr. B:
    Have you come across any inflation and use and productivity adjusted charts on commodities. After all even if gasoline is inflation adjusted about @ all time high, what if you adust for productivity – we get 2-3 times the mileage as in 1970’s – and we travel at avg. greater speed – but we (use) travel further on commutes to work. Similiar question on other commodities.

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