The Real Reason for Rising Commodity Prices:
An article today in The Wall Street Journal highlights the latest rise in the price of wheat. Blaming bad weather, it notes that the “global wheat market is caught between freezing winds and a sirocco.”
The WSJ therefore warns that “investors should beware of whiplash as weather normalizes.” Given that wheat is “up 13% since the start of December”, it is good advice – if weather were to blame.
The reality is that wheat is being driven higher by more than bad weather. The price of wheat has been climbing since June, a fact conveniently ignored in the WSJ article, perhaps because it doesn’t square with its premise that bad weather is causing higher wheat prices. Are we to believe that the market knew seven months ago that weather around the world today would be so bad that it would impact global wheat output? Or has wheat – which has risen $3.50 per bushel, or 70%, since its June low – been climbing steadily higher over these several months for another reason? And more to the point, why are all commodity prices rising?
For example, since June copper has risen $1.70 per pound, or 59%. Is bad weather to blame?
And it ain’t just wheat and copper that have skyrocketed. Bad weather can’t explain the simultaneous explosion in prices for non-agricultural commodities like palladium or heating oil over the last year.
This is what happens when central banks promote loose money and low interest rates. All of that money chases investments and everything goes up.
Notice what didn’t go up in value: money. The US dollar (USD) and the Euro (EUR) are at the bottom of the chart. They lost value in 2010.
If you’re worried about rising commodity prices, one way to hedge is to invest in precious metals, which tend to keep place with commodity inflation (CRB is the CRB Continuing Commodity Index):
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Puhlease.
cant eat gold. Silver don’t disinfect. If there is something to put your cash into, these pundits won’t tell you. Think for yourself……and good luck.
Mmmm… gold…
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But the answer is Global Warming is causing it. Paul Krugman says so. [No link; I think it was at Hot Air's Headlines.]
Les Jones, have you ever stopped to question the “value” of the Federal Reserve Note? Obviously not, because it is famous for not having an intrinsic value.
Every measure of worth greater than zero is due to advertising, to coercion, and to bad information. And thanks to misguided Americans like yourself, this has worked well for nearly one hundred years. Sort of.
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John Galt, you of all people should know, you can eat gold & silver, and so can your car. For some amount of either, I’ll happily provide you with a meal – now or in that nasty future when I pass on the guy in front of you with his back-pack full of $US and his family’s belly full of air.
When ATMs and “swipe your card” takes a day or week off, I’ll bet I can find a gas station to trade an OZ of Silver for a full tank of gas.
Forever stamps seem like a good idea – although, I’m not sure that the USPO is immune to weather anymore.
Commenter: “Les Jones, have you ever stopped to question the “value” of the Federal Reserve Note?”
Many times. The more Ben Bernanke prints of them, the less they’re worth.
John Galt: “cant eat gold.”
If you notice that last chart, gold prices has tracked the price of commodities, including food, so owning gold is a great hedge against rising food prices.
The “can’t eat gold” comeback seems to be from people who only think of ogld in terms of emergencies societal breakdown. Sure, you should have emergency supplies and spare food, but you can’t convert your 401k to canned goods.
Strictly from an investment point of view, you need something to preserve your wealth against inflation and currency debasement. Right now that’s looking like gold and silver.
I’m sure that weather is a contributing factor. Look at how the rate of increase is well above gold.
At least you’re not blaming it on ethanol! lol
I agree undoubtedly that inflation is occurring, but to place the bulk of the blame on US monetary and banking policies is myoptic.
If you want to understand why small changes in commodity availability are creating wide swings in commodity prices, you need to look to Asia and the growth there. The increasing wealth in Asia is also a key contributor to the increasing unrest in the MidEast. Spengler in the Asia Times has a good tutorial on this topic: http://www.atimes.com/atimes/Middle_East/MB02Ak01.html .
LoboSobo: that chart is for an entire year. How is that weather in December and January shifted prices that much? Wheat prices started going up last summer. And how does weather explain the jump in palladium and oil?
C.E. Hudson: if those markets are doing so great, why is the Baltic Dry Index (a measure of global shipping) in the dumpster? You can’t have wealth without trade in real goods.
http://www.bloomberg.com/apps/quote?ticker=BDIY:IND (and click on 5 year to get a sense of how lousy the global economy is in 2011)