The following editorial was published in Price Perceptions issue #1232 on December 21, 2002

Commodity Inflation? – Part II

Inflationary attitudes are difficult to measure and even more difficult to predict...
  • In the mid-Seventies, an OPEC embargo pushed oil prices up from $3 per barrel. Public fear of gasoline shortages led to consumers topping off gas tanks and individuals buying storage tanks to fill with heating oil and gasoline. Crude oil prices advanced to record levels, even after the embargo ended.


  • In the mid-Seventies, homemakers believed sugar could become scarce. Grandmothers were seen buying 100 pound bags of sugar to store at home and prices exploded to 65 cents per pound.


  • In the late Seventies, investors feared the value of the dollar would collapse and bought silver as a hedge. The silver market exploded and reached $50 per ounce.


  • Tax cuts in the early Eighties generated enthusiasm for long term economic growth. Investors began buying stocks and by the mid-Nineties a classic mania was underway.
In recent years, commodity producers and consumers have allowed inventories to fall to unprecedented levels, relative to demand. Global trade expansion, on time inventory management, and instant communications have made inventory holding very unpopular. The propensity against owning inventory has never been greater... Central banks have sold off gold reserves... Governments have disposed of grain reserves... The US cattle inventory is at a twelve year low... And, the US is more dependent on foreign energy than ever before.

However, attitudes against owning inventory are beginning to change...
  • Metals dealers have found that too much gold has been sold forward and inventories are inadequate to meet current demand.


  • Farmers in Argentina and other South American countries are holding back crops because grain is a better storehouse of wealth than bank deposits.


  • In the late Seventies, investors feared the value of the dollar would collapse and bought silver as a hedge. The silver market exploded and reached $50 per ounce.


  • Energy providers are building natural gas inventories as new drilling is inadequate to meet growing demand.


  • Brazil cut import taxes on wheat in hopes of offsetting the rising price of flour and bread.


  • Energy providers are building natural gas inventories as new drilling is inadequate to meet growing demand.
Inflationary buying is beginning to shift from equity markets to commodity markets. Gold reached five year highs this week... Energy prices are rising... Cocoa recently made new 17 year highs... And, the CRB index is at a five year high. Shifting inflationary attitudes could lead to major bull markets in commodities during 2003.

Bill Gary
President/Editor
CIS, Inc.


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