State of Denial

The WealthCycles Staff

On a day when crude oil passes $104 a barrel and gold crosses $1,380 an ounce, we would like to reflect on inflation in the currency supply and inflation in commodities. In the grand cosmic drama of international relations, every country seems to be dealing with inflation in their own idiosyncratic ways.

In China, rising food prices gives reason to blatantly manipulate the data, as the government cuts the weighting of food prices in its price index this month in order to keep a lid on reported inflation. Price indices are supposed to represent a typical consumer’s consumption with a fixed basket of goods, so when the price of food rises, price indices should reflect that people will spend more on food. Perhaps the bureaucrats in the offices of China’s statistics bureau don’t realize that rising food prices mean consumers are forced to spend more on food.   

In the United States, we make a show out of it—sending our own central bankers and finance ministers on television to deny any responsibility for inflation problems. According to them, it’s not the trillions in practically free loans given to banks, or the $1.4 trillion in new currency—it’s rising prosperity and demands for higher quality foods that are driving prices. It is hard to imagine a portrait of people in emerging markets rising out of abject poverty and suddenly demanding a filet mignon as a driver for higher food prices.

What China and the United States are saying and doing is completely at odds with what World Bank President Robert Zoellick is saying:

“Global food prices are rising to dangerous levels. The price hike is already pushing millions of people into poverty and putting stress on the most vulnerable, who spend more than half of their income on food.”

According to the U.N., the ranks of those in extreme poverty will swell to 1 billion by the end of this year, as food price increases filter down to consumers. So when bureaucrats, politicians, and corrupt economists tell you that inflation is under control, or there is no inflation, just think about this chart.

Wow! should of bought more cotton =) haha! will that repeat this year?

Where are the cotton investors at?

Good question... Cotton prices are heavily affected by weather, and this was a particularly bad year for weather, but who knows?

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And you gotta admire the quack economists at the Bureau of Labored Statistics who can take the data in that graph, plus tuition rising 8%, and health care costs rising at 9%, and somehow twist it all into a year-over-year CPI of 1.6%.

"Lies, D**n Lies, and Statistics", I believe that is how the quote goes.

Silver is close to 90% in price change.

When rates increase, all commodities are gonna plummet.
The majority of them in the chart are in a bubble.
Beware of the fall! Prices always take the stairs up
and the elevator down. I'll wait for the big pullback.

I agree with you that the Fed increasing rates would likely put downward pressure on these commodities, however, I don't think the equation is that simple. Increased rates will also put increased pressure on homeowners with adjustable rates, put upward pressure on the dollar, put increased costs on lending, slow the flow credit, and could decrease the velocity of money.

We are in the world of ZIRP (Zero Interest Rate Policy), no one know exactly how the economy is going to react when we come out of this world.

So while I would agree with the general observation that increased intrest rates put downward pressure on commodities, there are many more implications that could make that general rule not apply to this circumstance.

A question though, what are the reasons you believe commodities are in a bubble?

nicholas - WealthCycles Administrator

Someone tell me what good any of my physical "metals"
are gonna be good for when all hell breaks loose as
predicted by various "gurus" who tell you to own gold & silver?

If someone wanted to trade my food for gold and silver,
I would laugh at them. Hyperinflation will create chaos
in the streets and the only things that are going to matter
are weapons, survival training and food. Think about it.

Hello,

You should prepare based on the the degree of societal break down you believe will occur. For example, if you live in LA and believe the nuclear apocalypse is going to come, maybe you should prepare by moving out of the city and to somewhere unpopulated. 

Michael Maloney believes that while the break down will be enough to cause panic, the world will still function. In this enviorment Gold and Silver will do very well. This is why he owns gold and silver and why he hasn't moved out of Los Angeles. He does not believe he you will need survial training.

nicholas - Wealthcycles Administrator

It's showing a 1 year change in prices.( Look at graph on the palladium line)

Is this graph showing some average of worldwide prices?

The chart is showing the percentage of price increase in terms of dollars in the Futures market.

The chart shows the one year change in price for those commodities, based on their continous futures contracts, which is within a hair of their spot prices. The chart does not the price of futures, but the spot that the futures market implies.

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