frustrated@base metal prices -- trotsky, 14:34:08 10/17/06 Tue
moa said: "runaway copper, zinc, nickel and tin prices all point towards one thing. The monetary system is flying apart."
to which you replied:
"so, inadequate supply in the face of huge demand hasn't been a factor"
in a sense you're both right. the question is, what has occasioned this demand? the NORMAL free market course of events is that commodities become ever cheaper. this is because extraction technologies continually improve, i.e. the productivity of mining/farming is steadily rising over time.
the enormous surge in demand and sharply rising prices have been set in motion via a boom - and that boom is the result of monetary inflation running amuck. for instance, China isn't merely industrializing - it is also growing its broad money supply at rates of well over 20% annualized. it hoards a pile of fiat dollars which it receives for its exports, without 'sterilizing' the effects on its own banking system. the fiat money system is effectively lurching from one crisis to the next - and every time a crisis erupts (such as: 1987, 1998, the 'imagined crisis' of 2000, and so forth), the central banks of the world react by printing truckloads of money and goosing credit creation. then the next boom ensues, but the beneficiaries of such booms can never be discerned in advance. this time around, houses and commodities became the target of the inflation, whereby it is a golden rule that inflating assets will attract even more funds that inflate them further.
it is also important to note that the major driver of the price moves in markets in which speculative activity is possible is market psychology. the fundamentals will ALWAYS take a back seat to the market-mind. we have discussed this in the past. in the 20 years from 1980 to 2000, broad US money supply M3 grew from $1.8 trillion to nearly $8 trillion, the consumer price index increased from ca. 70 points to about 210 points, and the government's debt grew about 8-fold. if i had apprised a gold bug anno 1980 of these future developments, he would have run out to buy more gold at $800 - after all, these fundamentals would practically ensure the then widely talked about targets in the thousands would eventuate.
well, gold fell from its $850 high to a mere $250 in the 20 years during which all those gold-friendly fundamentals came about.
there can be only one answer as to why: market psychology. a bull or bear market doesn't care about fundamentals. IT CREATES ITS OWN FUNDAMENTALS AS IT GOES ON.
it is the psychology or mood of the herd that creates bull and bear markets, and creates positive or negative fundamentals underpinning them. it is this same mass psychological mood state that determines our tastes in art and fashion, our political leanings, our desire to procreate and it also decides whether there will be war or peace.
it is important to understand this crucial cause-effect vector - it is NOT the fundamentals that create the psychology that then leads to a bull market - it is the other way around. whether central bankers are 'tight' or 'loose' in their policy ALSO depends on the social mood of the day.
since the fiat money system is entirely 'faith based' - essentially, a confidence game - it is especially prone to often violent reactions to such mass mood swings.
you are correct that the demand from emerging economies collided with a supply situation that has developed as the result of a 20-year bear market in commodities - however, if the social mood in China were negative instead of positive, it would still be mired in Stalinism instead of having a thriving free enterprise system, and commodities would likely have remained cheap. |
