Outsize Demand for Commodities and Gold

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Today’s Daily Reckoning will be a bit light. First, we don’t have much to say…and second, because we have no time to say it anyway.

As to the first issue, nothing much happened yesterday. The Dow retreated only 39 points. Oil slid only $3, to $115. The dollar rose slightly – to $1.55 per euro. Only gold seemed to want to go somewhere – down $18.

As near as we can figure, most investors think the worst is over. After a correction, stocks are going back up. The dollar too. Gold, meanwhile, is going down. Bernanke, Bush and the whole company of angels and archangels who watch over our economy and our money are winning, they believe.

But the more they win…the more you lose, dear reader. Because there are mistakes that need to be corrected. There are errors that need to be punished. Truth needs to be discovered.

And the longer the correction is delayed…the more we live in darkness and error, and the more it costs to fix things. You don’t have to be an economist to figure this out. It’s just the way the world works.

We ended yesterday’s note by reminding ourselves what money really is. When a bank makes an electronic transfer, electrons are the only thing that crosses a street. But those electrons represent pieces of green paper…which, in turn, represent wealth. And what is wealth? It is limited resources…the potential to take up some of the world’s coal, iron, plastic…anything from a ton of wheat to a brand new Mercedes…to some working man’s time. The problem, fundamentally, is that the credit expansion of the last 25 years gave too many people too many claims against those limited resources. Then, when they went to exercise those claims – against stock market earnings in the ’90s…then against houses in the early ’00s…and now against oil, rice and gold – prices rose. The rising prices sent a phony signal. They convinced investors that there was more demand for dotcom stocks and houses than there really was. And today, they’re signaling an outsize demand for commodities and gold. As money pours into the bubble sector…more and more resources – time, capital, things – are misdirected away from things people really want and need and into the bubble. Eventually, the bubble pops…losses are taken…and rebuilding can begin a firmer foundation.

‘But wait,’ we anticipate your question, ‘are you saying that commodities are going to crash too?’

Yes…of course. Every farmer in the world is working hard to make it happen. Lured by high prices, they are bound to overproduce. They always do. Over-production is, by definition, a mistake. It will need to be corrected, eventually…just as overbuilding of new houses is being corrected…and just as overinvestment in NASDAQ dotcoms needed to be corrected.

In the case of commodities, however, as Jim Rogers pointed out in yesterday’s guest essay and as our own commodities guru, Kevin Kerr tells us: commodities may correct…but they will never go to zero. The demand for things that power the world will never go away. We will always need grains…sugar…beef…corn. The key to commodities trading, Kevin is wont to tell us, is making informed, calculated decisions.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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