May

11

One would think commodities would have an ever upward drift in price (everything gets more expensive, right?). Yet, a quick check of historical charts show they are boom and bust; there is no upward drift as in stocks. Why?

My take on it is very basic. The first law of the universe is to survive, the second is to grow. Corporations must grow to survive. All organisms are driven by that basic tenet, unfortunately even government agencies.

Corporations are growing, expanding organisms that morph to change and adapt in their inherent drive to survive.

Commodities are not such an organism… just a price. There is no drive or motivation for an ear of corn to sell at a higher price, to take over the world or gain market share. This also should serve as a warning to commodity long-only index or basket funds. Again, look at those long term charts!

Stocks drift higher because the way of man is to improve, grow, get better. Nothing has been able to stop that; not dictators, nor Communists or Socialists. Stock prices will always advance long-term as corporations are in the business of expanding and taking advantage of opportunities.

It does help the averages that dying stocks are removed (there are only a handful of stocks in the Dow that were also there 20 years ago) yet growth and value are always there to be discovered.

Go forth and prosper is the motto of all corporations.

Gregory van Kipnis writes:

Your observation is correct. I saw the same thing when I analyzed the data 25 years ago. The arguments made then were:

  1. stocks rise because the have growing earnings; commodities have no earnings
  2. ceteris paribus inflation is offset by storage and financing costs
  3. quantity supplied grows along with demand growth, more or less, not so for individual stocks
  4. commodities are substituted when one becomes relatively too expensive

The long term indexes are usually geometric means of broad baskets of agricultural and industrial commodities. Over time there are substitutions, e.g., kerosene for whale oil.

Eli Zabethan adds:

One must consider carry when looking at futures. There is a world of difference between the non carry considered charts and those where carry is considered…

Greg Rehmke offers:

Commodities as “natural” resources goes down in price over the long term (only one resource, labor, goes up in price). As Julian Simon explained, man is The Ultimate Resource, and all others we call natural now were once just rocks.

Black gunk bubbling up in salt marches became oil after whales became scarce and people started looking around for substitutes. The early oil in Pennsylvania ran out quickly, and only after Rockefeller’s army of chemists discovered how to get the sulfur out of similar black gunk in Ohio did it become oil too.

Discovering resources requires reason, freedom, and hard work. Without these rocks stay rocks, tar sands stay buried and useless, penicillin stays mold, DDT stays banned.

Over recent decades more and more world oil and mineral supplies left the free world and fell into government hands. I am reading about Zambia in Robert Guest’s book “The Shackled Continent.” Copper production in Zambia peaked in 1969 at 825,000 tonnes a year. Then it was nationalized and production has since fallen by two-thirds.

Oil resources, nearly all discovered by free people in private firms, have been grabbed by governments around the world. (Oil reserves in Russia, during few years of relative freedom between Soviet control and Putin control, went up dramatically.)

The economic freedom finally reaching hundreds of millions in China and India is lifting wealth creation and the demand for natural resources. How fast entrepreneurs, engineers, and enterprises respond to higher prices with new discoveries, technologies, production, substitutes, and efficiency gains, is anyone’s guess.

But looking back at the inflation-adjusted prices for natural resources over the decades and centuries shows a steady trend.

Of course, as commodities are priced in dollars, it is not clear whether the genius of private industry in extracting natural resources from the earth will match the “genius” of governments in extracting value from fiat currencies.

 


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