Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Monetary Inflation and Supply Concerns Drive Commodities More So Than Demand

Commodities / Commodities Trading Feb 11, 2011 - 03:38 AM GMT

By: Jordan_Roy_Byrne

Commodities

Best Financial Markets Analysis ArticleThe mainstream press loves to talk about emerging market demand as a cause of inflation, rising prices and the bull market in commodities. Did emerging markets suddenly begin demanding food, energy and metals in 2001? What about five and ten years earlier? Its a rhetorical question. The conventional wisdom is wrong.


Inflation is driven by low interest rates and lax credit conditions. Severe inflation is driven by the inability to finance or grow out of debt.

Commodity bull markets are primarily driven by monetary factors. Secondarily, a lack of production eventually leads to much higher prices. Commodity industries are cyclical in the long-term. They go from periods of oversupply to periods of underproduction which then creates a lack of supply and a need for higher prices to stimulate new production. The big moves in individual commodities or sectors are driven not from demand but from a lack of supply.

There are numerous examples.

Let’s start with the rare earths. China accounts for 95% of the world’s supply and its projected that within a few years China will not be able to supply its own demand. This is why China is cutting export quotas and may form its own OPEC-like group to control the rare earths market. Sure, their demand is strong but the real problem is there is basically no production outside of China. Molycorp owns the only rare earths mine in the US (Mountain Pass in California) and it hasn’t been in production for years.

Does this industry have too much demand or too little production? Again, its a rhetorical question.

Consider uranium. Most know the story. Its an industry that has lived off of stockpiles for a long-term. That is going to end in 2013 with the end of the Russia/HEU agreement and so more production will be desperately needed in the coming years. Look at the picture below. Reactor requirements (demand) has risen consistently for decades. Obviously, its the supply/production picture which moves the market.


Precious Metals are actually the outlier. It is investment demand that moves the market. Some analysts like to mention global growth and more buying of jewelry but that has little impact on the major bull and bear cycles.

The most absurd theory is that food prices are rising because of rising demand. Did millions more Chinese suddenly begin eating now relative to five or ten years ago? Take a look at this graph from AgoraFinancial.

Growth in population, meat consumption and grain consumption is reliably steady. Food prices don’t rise because there is more demand. That is asinine. Food prices rise primarily because of supply and inventory factors along with monetary factors.

Monetary inflation creates artificial demand which triggers higher prices. Our monetary inflation is exported to China. China takes the incoming US Dollars and prints Yuan to maintain the currency peg. That causes inflation. China then spends money domestically and also abroad, triggering inflation in other nations. Furthermore, inflation raises the cost of production and bringing that supply to the market.

In the big picture, inflation is a major driving force for the commodity sector as a whole. In regards to specific commodities, the real commodities gurus like Jim Rogers and Rick Rule always look first at supply factors because they know that is the number one driving force behind the biggest runs. Presently, the uranium market is in a very large deficit and a surge in production is required over the next five to ten years. Growing demand is just icing on the cake.

Good Luck!

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
Subscription Service

Trendsman” is an affiliate member of the Market Technicians Association (MTA) and is enrolled in their CMT Program, which certifies professionals in the field of technical analysis. He will be taking the final exam in Spring 07. Trendsman focuses on technical analysis but analyzes fundamentals and investor psychology in tandem with the charts. He credits his success to an immense love of the markets and an insatiable thirst for knowledge and profits.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules