Gold, silver, oil, coffee beans, lean hogs, you name the commodity, and it's likely soared in price recently causing many to believe inflationary times are just around the corner. It's hard not to jump on-board the "rising prices" express train as we all feel the pinch at the grocery store and gas pump. Heck, gold is up 25% this past year after rising over 32% the previous 12 months. Crude oil prices are once again approaching their 2008 highs having already exceeded the highs achieved in the early 1980's. Coffee is nearing a 12 year high and even lean hogs are earning much fatter payouts at the slaughter house these days.
So, what's going on? Has demand really increased that much thereby putting undue pressure on "limited resources" to drive up prices? Simple economics tells us supply and demand are the key drivers to any marketable commodity valuation analysis. So, doesn't it seem that with huge jumps in prices in nearly all commodities that there would be a corresponding jump in demand and/or a relative contraction of supply?
Well, I have to dismiss the contraction arguments as simply not possible. Certainly, there may be short-term interruptions in supply (like when an oil fire occurs at a refinery) but those are temporary and short lived. Believe me, there is no more of a shortage of oil reserves identified today than what was identified a few short years ago. And, with gold at these levels, plenty more will be unearthed to offset any perceived shortages; crops are more and more technologically engineered thereby increasing production yields. So, just in the past few years we've not seen any significant longer term limitations of supply that might account for the large swings upward in commodity prices.
That leaves demand as the key driver to commodities having rocketed in price if there is any substance to the increase besides outright speculation. Higher demand is caused by either: increased consumption as a result of different uses (as when corn is used to produce ethanol) or increased consumption from population influences (certainly a combination of both as well). My take is when you look at all the different commodities, we've not seen either of these come into play. It's not like the latest tablet craze consumes so much gold that there is huge demand because of its advent. Further, it's not like the world added a billion people in the past few years or that the world's population now consumes substantially more on a per-capita basis lets say of coffee. Sure there are a few countries that are prospering well and consumption is up (China, Germany, etc.) but there are equally those that are not and consumption is down. I admit that I have over simplified much of the economics behind the rise in commodity prices but that's about as complicated as it needs to be especially after most economies are still below pre-recessionary growth and prosperity levels.
Inflation is only a speculative scare which will be derailed by deflationary pressures as the world learns to cope with less demand for everything. Stay tuned!
