21 July 2007
Two conflicting worldviews underlie the current commodity and precious metals bull market. It is worth taking time to contrast the two views explicitly.
An Optimistic View
The more popular commodity supercycle views holds that a booming world economy, driven by Asian demand, will restore the commodity cycle to its previous (inflation-adjusted) highs. If this view is correct, commodities generally will continue to increase in value for at least the next decade or two, if not for the remainder of the century. Commodity prices will be dramatically higher than they are today, and our ability to cover the cost will be enabled by continuing global monetary inflation (ever-increasing money supply).
The commodity supercycle view holds that demand will outstrip the supply of most commodities as far as the eye can see. We will be able to afford higher commodity costs because global free trade will continue to keep labour and production costs of finished goods relatively low.
This relatively benign worldview is based in large part on continued acknowledgement by the international community of the benefits of expanding free trade with the developing world, particularly southern and eastern Asia.
Within this worldview, gold and silver will increase in value because they are commodities in short supply in a world with unceasing demand growth. Also, some commodities will increase in value much more than others, based on ultimate limits in supply.
For example, as mining activity increases, relatively plentiful materials (such as uranium, for example) will increase in supply, and their costs will not rise so dramatically as scarce materials, such as – in particular – oil, natural gas, gold, silver and platinum.
A More Pessimistic View
However, the precious metals bull market view offers a darker perspective on of the future of our global economy.
In this view, monetary inflation is destabilizing economies and societies around the world, and our world is becoming a more dangerous place.
This darker perspective allows for the possible rise of multiple negative developments:
- Traditional rivalries may intensify rather than be resolved.
- Competition for scarce resources may stoke rather than douse the fires of international rivalry. The practice of warfare may increase rather than decrease.
- Ideological conflicts may intensify, resulting in the rise of anti-business and anti-free market sentiment, particularly in relatively poor but commodity-rich nations (think Venezuela and Saudi Arabia, for example).
- Concerns about globalism and free trade may fuel rising protectionist sentiment, resulting in more constrained rather than freer trade between nations.
- Inflating currencies may reach the point of crisis, leading to the decline or collapse of unstable currencies, even among the world’s leading nations.
- Unsustainable individual, corporate and government debts may be rendered unpayable due to slowing business activity, resulting in individual and corporate bankruptcies and the failure of governments.
- Unsound economic fundamentals could sink vulnerable economies, including those of such major powers as the United States and France, as well as those of second tier players such as South Africa, Russia and Venezuela. The fallout from this development could lead to global recession or depression.
The precious metals supercycle view is a much less benign conception of how world events may develop over the coming decades.
To be honest, I would much prefer to see the commodity supercycle view prevail. It is far more benign and optimistic than the precious metals supercycle view of the unfolding future.
However, I don't know which of the two models will best describe our global future.
An inherent advantage of precious metals investing is that it allows for either development. Gold and silver will do well whether the unfolding future delivers a continuing business-based commodity boom, or a liquidity and debt-driven global crisis and economic collapse.
A Combined View
In fact, some parts of both scenarios could unfold simultaneously.
For example, the Asian economies might continue to do well in the face of declining US and possibly European economies.
The US might fall into crisis due to its more unbalanced economic fundamentals, but perhaps many nations might avert the development of similar crises within their borders, due to sounder economic fundamentals.
Europe might continue to perform comparatively well, based on relative fiscal conservatism, in contrast to the profligate United States.
I expect Canada to perform much better than the United States in the coming decades due to Canada’s role as a global leader in mining investment and commodity production, as well as to our smaller population base.
Will our future therefore be expansive, even if perhaps somewhat unstable?
If so, that will mean that the commodity supercycle view has predominated.
Will our future be harrowing, difficult and dangerous?
In that case, the darker precious metals supercycle view will have proven correct.
My own preference is to think optimistically. Martin Seligman has argued that optimists are individuals who plan for the best and prepare for the worst.
Think of me then as an optimistic gold investor.
In the best case, gold will rise with commodities, and developments in supply and demand will drive the price ever higher as gold becomes so precious that only the richest individuals and nations can possess it.
In the worst case, gold will remain a store of value as currencies collapse, economies slow, and our world becomes more uncertain and/or dangerous. I don't like this view of the future, but owning gold is a prudent way to prepare for such an undesirable set of eventualities.
Whether you are an optimist or a pessimist about our global economic future, gold appears to be a particularly wise investment at this point in our planet's history.
Two conflicting worldviews underlie the current commodity and precious metals bull market. It is worth taking time to contrast the two views explicitly.
An Optimistic View
The more popular commodity supercycle views holds that a booming world economy, driven by Asian demand, will restore the commodity cycle to its previous (inflation-adjusted) highs. If this view is correct, commodities generally will continue to increase in value for at least the next decade or two, if not for the remainder of the century. Commodity prices will be dramatically higher than they are today, and our ability to cover the cost will be enabled by continuing global monetary inflation (ever-increasing money supply).
The commodity supercycle view holds that demand will outstrip the supply of most commodities as far as the eye can see. We will be able to afford higher commodity costs because global free trade will continue to keep labour and production costs of finished goods relatively low.
This relatively benign worldview is based in large part on continued acknowledgement by the international community of the benefits of expanding free trade with the developing world, particularly southern and eastern Asia.
Within this worldview, gold and silver will increase in value because they are commodities in short supply in a world with unceasing demand growth. Also, some commodities will increase in value much more than others, based on ultimate limits in supply.
For example, as mining activity increases, relatively plentiful materials (such as uranium, for example) will increase in supply, and their costs will not rise so dramatically as scarce materials, such as – in particular – oil, natural gas, gold, silver and platinum.
A More Pessimistic View
However, the precious metals bull market view offers a darker perspective on of the future of our global economy.
In this view, monetary inflation is destabilizing economies and societies around the world, and our world is becoming a more dangerous place.
This darker perspective allows for the possible rise of multiple negative developments:
- Traditional rivalries may intensify rather than be resolved.
- Competition for scarce resources may stoke rather than douse the fires of international rivalry. The practice of warfare may increase rather than decrease.
- Ideological conflicts may intensify, resulting in the rise of anti-business and anti-free market sentiment, particularly in relatively poor but commodity-rich nations (think Venezuela and Saudi Arabia, for example).
- Concerns about globalism and free trade may fuel rising protectionist sentiment, resulting in more constrained rather than freer trade between nations.
- Inflating currencies may reach the point of crisis, leading to the decline or collapse of unstable currencies, even among the world’s leading nations.
- Unsustainable individual, corporate and government debts may be rendered unpayable due to slowing business activity, resulting in individual and corporate bankruptcies and the failure of governments.
- Unsound economic fundamentals could sink vulnerable economies, including those of such major powers as the United States and France, as well as those of second tier players such as South Africa, Russia and Venezuela. The fallout from this development could lead to global recession or depression.
The precious metals supercycle view is a much less benign conception of how world events may develop over the coming decades.
To be honest, I would much prefer to see the commodity supercycle view prevail. It is far more benign and optimistic than the precious metals supercycle view of the unfolding future.
However, I don't know which of the two models will best describe our global future.
An inherent advantage of precious metals investing is that it allows for either development. Gold and silver will do well whether the unfolding future delivers a continuing business-based commodity boom, or a liquidity and debt-driven global crisis and economic collapse.
A Combined View
In fact, some parts of both scenarios could unfold simultaneously.
For example, the Asian economies might continue to do well in the face of declining US and possibly European economies.
The US might fall into crisis due to its more unbalanced economic fundamentals, but perhaps many nations might avert the development of similar crises within their borders, due to sounder economic fundamentals.
Europe might continue to perform comparatively well, based on relative fiscal conservatism, in contrast to the profligate United States.
I expect Canada to perform much better than the United States in the coming decades due to Canada’s role as a global leader in mining investment and commodity production, as well as to our smaller population base.
Will our future therefore be expansive, even if perhaps somewhat unstable?
If so, that will mean that the commodity supercycle view has predominated.
Will our future be harrowing, difficult and dangerous?
In that case, the darker precious metals supercycle view will have proven correct.
My own preference is to think optimistically. Martin Seligman has argued that optimists are individuals who plan for the best and prepare for the worst.
Think of me then as an optimistic gold investor.
In the best case, gold will rise with commodities, and developments in supply and demand will drive the price ever higher as gold becomes so precious that only the richest individuals and nations can possess it.
In the worst case, gold will remain a store of value as currencies collapse, economies slow, and our world becomes more uncertain and/or dangerous. I don't like this view of the future, but owning gold is a prudent way to prepare for such an undesirable set of eventualities.
Whether you are an optimist or a pessimist about our global economic future, gold appears to be a particularly wise investment at this point in our planet's history.
I read your blogs, Laurence but I often don't "get" them ... they're way over my head. Apparently, according to your Clustrmap, I'm in a minority. You have a worldwide fan-club!!
ReplyDeleteOK Wendy,
ReplyDeleteHere's the dumbed-down version.
Buy gold and gold mining companies (consider Goldcorp and/or Western Goldfields as core holdings, or buy speculative Benton Resources Corporation as a long-term buy-and-hold - it is volatile short-term).
Watch science fiction movies. Go to Firefly conventions.
Read Marcel Proust's novels.
Think about the movies you watch and the books you read.
Write your thoughts.
Upload them to a blog.
There - it's that easy!