Today's chart is an update of one we have seen before--a state space plotting the gold-copper ratio against the silver-rough rice ratio (month-end prices) over the last fifteen years.
The plot has been confined to the yellow blob for most of the past sixteen years. Generally speaking, all four of these commodities have been inflating at the same rate, with excursions in one direction or another, normally in response to inflation appearing in one or two of these commodities for a short time before the others catch up--which could be viewed as reversion to the mean.
Prior to the beginning of last year, the only two excursions outside of the yellow area were: the one at the top of the graph, reflecting the collapse of commodities in late 2008 (with gold relatively outperforming); and the one at the bottom, reflecting the rapid increase in both copper and silver in 2006.
In the last eighteen months we have seen a remarkable excursion, mainly reflecting a rapid increase in the price of silver. Going forward, there are two possibilities, each with its own implications for the resource space. One possibility is that we are seeing some kind of breakout with respect to the metals in comparison to agricultural commodities. The other possibility is that we are only seeing a burst of inflation in the metals prices, which will shortly be matched by a rise in agricultural commodities (we would need to see roughly a doubling in the price of rice to return to the yellow blob--or a halving of the silver price). The billion dollar question is which scenario will play out.
Disclosure: long gold, long silver, long rice (physical possession only).
The plot has been confined to the yellow blob for most of the past sixteen years. Generally speaking, all four of these commodities have been inflating at the same rate, with excursions in one direction or another, normally in response to inflation appearing in one or two of these commodities for a short time before the others catch up--which could be viewed as reversion to the mean.
Prior to the beginning of last year, the only two excursions outside of the yellow area were: the one at the top of the graph, reflecting the collapse of commodities in late 2008 (with gold relatively outperforming); and the one at the bottom, reflecting the rapid increase in both copper and silver in 2006.
In the last eighteen months we have seen a remarkable excursion, mainly reflecting a rapid increase in the price of silver. Going forward, there are two possibilities, each with its own implications for the resource space. One possibility is that we are seeing some kind of breakout with respect to the metals in comparison to agricultural commodities. The other possibility is that we are only seeing a burst of inflation in the metals prices, which will shortly be matched by a rise in agricultural commodities (we would need to see roughly a doubling in the price of rice to return to the yellow blob--or a halving of the silver price). The billion dollar question is which scenario will play out.
Disclosure: long gold, long silver, long rice (physical possession only).
With the worldwide demographic shift from subsistence agriculture to industrialism (and post-industrialism), yer darn tootin' that the metals should break out relative to ags.
ReplyDeleteIndustrialization creates more metals demand, and higher agricultural productivity from industrialization should lower agro prices.
There is much to commend your comment, but it is something I would expect to play out over a period of decades, rather than suddenly in the last two years.
ReplyDeleteOne of these days I will shake off the inertia and push the plot back to 1980 (I think the data is available for all of these) to see how much of the shift is technological and how much is monetary policy.
Price isn't a function of demand so much as it's a function of expectation of demand. And I'd think the speculative premium is an important part of the price, esp. when you look at how hard silver collapsed in the crash a few years ago. So, while certainly demographic shift can occur over decades, maybe the BRIC meme didn't particularly impact price expectations til just the past couple years? Silver/rice's excursion outwards then becomes an illustration of a high speculative premium caused by universal expectations of demographic-driven demand growth.
ReplyDeleteOr, if you'd like to ignore the "expectation" and "speculative premium" bit enirely, I could maybe argue that while demographic shift occurs over decades, there's a break point beyond which marginal increase in demand has an outsized effect on price. So, the green oval is where demand pressure is easily met by increased production, while outside the oval is where production can no longer keep up.
Anyway... a chart since 1980 would probably be interesting. Though I'd really be interested in one since 1970, so that we can see what happened during the inflation of the 70s.