In the long run, commodities are a bad bet

Commodities are booming at the moment. If you also happened to buy into silver at any time in the last year, you'll know this. It's seems as if the commodity boom will have no end. The "optimists" point out that we have a limited supply of natural resources, and demand for them shows no sign of declining.

True, but there is a serious flaw to this logic. There's a market adage that basically says if you bet raw materials are going to get more expensive, you are selling human ingenuity short, and you are also betting on political stupidity and greed. Over the past century, commodities have actually gotten cheaper in real terms, according to The Economist. This has been due to ingenuity (vast increases in efficiency, mining, transport, and production).

Political stupidity and greed seem like pretty good long-term (or any-term, really) bets. But hold on: if you are betting on commodity price increases and greed, you are also betting on economic growth to drive those prices up. Failing ingenuity, if prices continued to rise, this would eventually stall growth and cause them to fall again (much as they did a mere two years ago).

Commodity prices can only rise if ingenuity is insufficient while growth nonetheless remains strong (let's just assume government foolishness and avarice are a given). Since rising prices eventually destroy growth, commodity prices essentially check themselves over time. The questions are:
  1. How long a time?
  2. What's going to bring them down; ingenuity, or recession?
These questions matter a lot, because some answers are painful. One way or another, though, another old adage will surely hold true: what goes up, must come down.


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