Gold:A reason to own!!

The CEO of Freeport Mcmoran was on CNBC US, the other night. While the stock indexes plunged globally here was one guy with a smug smile on his face.

Reason: they own the biggest gold mines on earth and no new Gold discoveries have come about. At most a $ 1000 per ounce price tab, will see money being pushed into marginal mines to pull out whatever metal is left under the surface. In the entire history of mankind, the total physical Gold that has been mined equals a Cube with one side about 35 feet in height. Most of this Gold is held by individuals in Asia, and demand is rising as younger families set up homes and buy bullion to build and protect wealth. But there is no more metal in sight..so a possible multi-year bull market in Gold is in the making, that should see metal prices cross the $ 1500 to $ 2000 an ounce figure in maybe 2 years from now.

Miners can scarcely believe their eyes as gold soars through another 28-year record. How far can it go? So much money to spend digging! Suddenly there is no shortage of bullish forecasters to cheer them on!

Earlier this year US investment bankers Morgan Stanley saw a target of $ 800 an ounce for 2008. Then Goldman Sachs came in with an $850. The two bankers outbid themselves. And then there were the cautious Swiss. Its bankers UBS put up a miserable $760 for 2008 and $700 for 2009. They had been going for $650 and $550 respectively – whoops!

Australia ’s Bureau of Agriculture and Resources isn’t getting over-excited either. Being economists, they talk in averages. For 2007 they’ve computed $675 and for 2008 a figure of $685. At least we can understand that they don’t think gold will fall far. French bankers Societe Generale have been coy on a precise target, but are less bullish now gold’s gone through $750. Yet the Dutch, at bankers ABN Amro, are forecasting that gold will have a very good Christmas indeed.

Waves of investment and speculation
Maybe the Swiss, French and Aussies bankers aren’t so wrong to be cautious. UBS refers to the jewellery demand and the attention being given to gold by investors and speculators.

Its analysts are seeing “waves of investment and speculation”. (Trust the Swiss to spot the money flows. That’s why they’re going for wide price swings).Given the volatile conditions, that seems to be the pattern of all markets this decade, so profit taking should be expected.

Will it stay up, or will it go down? Everyone seems to be looking for inspiration in different places. Isabel and I have researched the world over, clicking our mice and logging notes.

Morgan Stanley is looking at global growth and spreading inflation problems. Both are good for gold. The record high oil price is doing more than its bit to fuel inflation fears. The International Energy Agency prompted oil forecasts of $100 for this winter, referring to “a lofty deficit.” The Germans, in the form of refining group Heraeus, said they were keeping an eye on oil in response to another factor - declining South African mining output. It was down 5.2% in the third quarter on a year ago.

The Germans also focus on central bank gold sales. That’s a huge point. Reducing central bank sales have brought gold up from 1999s depths of $251. And they have good reason note it. Germany’s Bundesbank is the largest central bank in the Eurozone. It has said it will sell only eight tonnes of its 120 tonne allocation in the new Central Bank gold agreement year (it starts this month). The remaining 3,414 tonnes will be held back.

ALL down to ETFs?
South African broker Macquarie First South is saying it is ALL down to the investors in Exchange Traded Funds (ETFs). “The ETFs are actually driving the gold price because there’s so much money going into ETFs,” the broker’s analyst David Hall says.The Indians are looking at themselves. India’s gold imports for jewellery have been a major impetus to the gold price rise. The peak gold-buying Dussehra and Diwali festivals are celebrated in November.

In the January-June period Indian gold imports shot up nearly 90% to 521 tonnes. Not only is the country increasingly prosperous, but the rupee has been rising. That has kept the gold price below the sensitive Rs 10,000 per ten gram level. While forecasts for increasing gold consumption are being cut over there, they still show a 15-25% increase.

More importantly, in a nation of 1 bn people, a couple of million marriages take place across the country in the months from Diwali to February, and even small amounts of gold bought per marriage of say 200 to 300 ounces works out to a whopping 200 mn to 300 mn ounces of Gold demand in perpetuity. Some agreeably will be re-cycled Gold, but the rest is demand for fresh Gold mined out of the Earth.

The coming years can be different as Governments rapidly de-base currencies and a Nation which had seen slavery for nearly 200 years will revert to buying even more Gold, in place of all other assets including cash and currencies.

In London the precious metal traders were looking at the weakness of the dollar against the Euro. Traders Virtual Metals is another with an $800 forecast. That’s based on the dollar falling along with US interest rates.

Also scoring in our log is that “super fund” set up by the big three US banks to help out market liquidity. Predictably, comment comes from JP Morgan. This should keep US interest rates, and thus global liquidity, accommodative it says. So, “inflation-related pressures on gold will continue”.

De-hedging programmes at the mines have been providing yet more backing for gold. Those smart Australian economists quite rightly make a big thing of this. If the miners put tonnes of their future, as well as present, production on the market, that is a big dampener. Miners may “hedge” or guarantee their income by doing this. The weight of supply kills the price.

Rising gold removes the incentive to sell future production. “In the first half of 2007, gold producers reduced their outstanding hedge positions by around 300 tonnes, providing strong support for the gold price,” says the Australian Bureau of Agricultural and Resource Economics’ latest commodity review. Majors who did this included Barrick Gold, Newmont, Lihir Gold, and AngloGold Ashanti.

Everyone is trying to pick the top
There are detractors around. Better be prepared for the “bears”. As traders Marex Financial point out: “Everyone is trying to pick the top.” The hedging issue is raised at Japanese broker Mitsui. Its head of precious metal research, Edel Tully, says it was inevitable that the rate of de-hedging would slow.

Last year the gold price was helped by production falling to a ten-year low. At the moment world gold production is expected to be roughly stable. Less from South Africa, more from Australia, and merging producers like China. That may change.

Still, the dollar is key. UK bankers HSBC put it succinctly: “We have long maintained that the US dollar is the primary influence in determining gold prices.”
Complaints about the effect of the lower dollar on export markets are coming from Europe and China. Will Washington listen when there is an $800 billion-a-year current account deficit to worry about? Undoubtedly not!

So, not many points to trigger profit-taking, then.

Gold:The price is surging so fast, its hard to keep!!

Courtsey:Rob Mackrill

The price of gold is surging higher so fast, it's hard to keep up. At time of writing it is at $843, only $7 short of its all time high. The price is being stoked by Morgan Stanleys talk of a more violent correction in the dollar, says a note from Gold Investments. Also, comment from Cheng Siwei vice-Chairman of the National Peoples Congress, that reserves should be diversified out of the dollar into other stronger currencies. That is expected to include gold - an intention that will be helped by its increasing domestic mining production.
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‘Oil and gold leap as investors flee the dollar,’ reads the Reuters headline.

Ah, the meat and two veg of the Daily Reckoning…

US light crude is just two bucks shy of the centurion. That is to say $100. Will it make it, we wonder?

Yes, said my oil trader friend last night. It will then fall back below, regroup and head higher still. Well that’s his bet anyway. But we tend to listen to his views closely given the last call was bullish at around the $60 level.

Worse he sees war coming and notes the oil coming out of Saudi is heavier these days, suggesting they’re getting towards the bottom of their vast but aging reservoirs. Saudi accounted for 13% of world production last year, but total production declined 2.3% over the previous year.

As for gold, the price is surging higher so fast, it’s hard to keep up. At time of writing it is at $843, only $7 short of its all time high. It’s already at all time nominal highs (ie not adjusted for inflation) and pushing higher against both the euro and pound, having hit €575 and £402 respectively.

The price is being stoked by Morgan Stanley’s talk of a more “violent correction” in the dollar, says a note from Gold Investments, as an FT headline warns of a possible fire sale of mortgage-backed securities. Also, comment from a senior Chinese politician, Cheng Siwei vice-Chairman of the National People’s Congress, that reserves should be diversified out of the dollar into other “stronger currencies”.

That is expected to include gold - an intention that will be helped by its increasing domestic mining production. The Chinese Gold Association expects to become the world’s number two producer this year, says an FT report and eventually top South Africa’s long held position as the world’s largest producer.

News of Cheng Siwei’s comments saw the dollar sink to 1.46 against the euro and $2.10 against the pound. This is the pound’s highest level against the greenback since 1981.

Yesterday was a pretty good day to hold a conference devoted to ‘poor man’s gold’. As silver hit a 27-year high at $15.50 there were some cheerful faces at London’s Silver Summit. It did even better this morning, topping $16.

With gold making the headlines, silver doesn’t get a lot of attention. You may be surprised to learn that the its price appreciation in the past couple of years has actually exceeded that of gold claims Rolf Nef, a Swiss fund manager with the kind of jumbled English and wild glint in his eye that makes you think... here’s a maniac. However, from what we could make of the quickfire slide show we certainly suspect he’s on to something...

Nef is a Swiss money manager and runs a fund which boasts 50% of its holdings in physical gold and the balance in silver options.

His fund fact sheet begins:

“Investment Idea: The world is swimming in a sea of debt (circa. $120trn), growing every day, which creditors think is money. The most practical money without a counter party is gold and silver.”

You get the picture... He presented for the second year running. And his message was the same this year as last. Sell your house and buy gold and silver. He even asked the audience whether anyone had taken him up on the advice from last time. One hand went up… and he was smiling.

Wake up to Gold!!--Mark O' Byrne

Successful investing is about the diversification and management of risk. In layman's terms this means not having all your eggs in one basket. We know from history that markets can and do occasionally crash and if you are not diversified, your nest egg can be severely affected. This principle is an important one and should be observed by all investors. A healthy portfolio includes a wide range of assets. Holding gold bullion in a portfolio can provide distinct benefits in the form of speculative gains, investment gains, hedging against macroeconomic and geopolitical risk and or wealth preservation.

One of the most well known auditors in the world is David Walker. He is the top auditor of the U.S. government - the Comptroller and Auditor General and the head of the non-partisan Government Accountability Office (GAO). He cannot be pigeon-holed as a “doom and gloom merchant”.

Last March he was interviewed on CBS’ “60 Minutes". He said that politicians in Washington were "bankrupting America". He's now on a "Fiscal Wake-up Tour” across America taking his message directly to the people, as he feels that much of the media and politicians in Washington are ignoring the massive long term fiscal challenges facing the U.S.

This August he wrote apiece in the opinions/editorials section of the Financial Times where he outlined his concerns: "America is a great nation, probably the greatest in history. But if we want to keep America great, we have to recognise reality and make needed changes... There are striking similarities between America's current situation and that of another great power from the past: Rome.

"The Roman Empire lasted 1,000 years, but only about half that time as a republic. The Roman Republic fell for many reasons, but three reasons are worth remembering: declining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government. Sound familiar?"

There are clear parallels between the huge challenges facing the US socially, politically and economically and those that led to the fall of the Roman Empire. With the emergence of rival superpowers such as China in the 21st Century, investors would be wise to be cognoscente of these big picture geopolitical trends and invest accordingly.

Successful investing is about the diversification and management of risk. In layman's terms this means not having all your eggs in one basket. We know from history that markets can and do occasionally crash and if you are not diversified, your nest egg can be severely affected.

This principle is an important one and should be observed by all investors. Most investors have most of their wealth in the stock and property markets. This strategy of having nearly all our eggs in these baskets has been successful in recent years. However, past performance is no guarantee of future returns and there are increasing signs that it would be wise to reduce allocations to these asset classes and look at other asset classes.

A healthy portfolio includes a wide range of assets including a properly diversified residential and commercial property portfolio; a variety of equities with exposures to different market sectors and regions; a small allocation to a variety of conservative government bonds; a ‘rainy day’ cash component and a 10-15% allocation to gold bullion.

Holding gold bullion in a portfolio can provide distinct benefits in the form of speculative gains, investment gains, hedging against macroeconomic and geopolitical risk and or wealth preservation. Importantly, gold is the only asset class with an inverse or negative correlation to the US dollar and to conventional assets such as bonds, stocks and property all of which are denominated in fiat paper currencies such as the US dollar, the Euro and the British pound.

Traditional asset allocation theory, as represented by the investment pyramid, advocates higher risk speculations at the top, with lower risk assets at the bottom. Futures contracts, options, individual shares and spread betting should be placed at the top of the pyramid, while cash equivalents and physical bullion, either fully allocated or delivered (as is done by the world’s Central Banks) should form the foundation or base.

In dollar terms, gold returned 24.75% in 2006, rising from $497 to $620 per ounce. It thus completed its 5th year of gains and is up by more than 160% in the last 5 years. So far in 2007, gold has returned 22.5% in dollar terms, rising from $620 to $760 per ounce.

Most commodity analysts remain bullish on both gold and particularly silver and believe that they are now both in multi-year bull markets. Commodities, like all asset classes follow long term economic cycles. Commodities increased in value in the late 1960’s and 1970’s. They broadly declined in value in the 1980’s and 1990’s and have been rising again since 2001.

We are not as confident on the outlook on some commodities such as base metals and some soft commodities which are more cyclical in nature and would likely be affected by a slowdown in the U.S. and global economy. Gold on the other hand is not solely a commodity but more importantly a universal finite currency held by every Central Bank of note in the world.

It is the only currency academically proven to have an inverse correlation to conventional assets such as bonds, equities and property. We believe gold will surpass its non-inflation adjusted high of $850 per ounce by early 2008 and its inflation adjusted high of some $2,400 per ounce in the next 10 years.

Highly respected analyst, Louise Yamada sees gold surpassing $730 this year on its way to $3,000 within a decade. “Gold is the purest play against the dollar,'' said Louise Yamada, managing director of Yamada Technical Research Advisors and former head of technical research at Citigroup. Yamada was voted Wall Street’s best technical analyst from 2001 to 2004.

Among the world's biggest financial institutions such as JPMorgan Chase & Co., Merrill Lynch and UBS, gold is also favoured by their analysts. Deutsche Bank AG's chief metals economist, Peter Richardson, made gold his favourite pick for 2007. “If you can only make one commodity investment,'' gold is the “choice for 2007.”

Gold is becoming Wall Street's darling again due to what Bloomberg's Pham-Duy Nguyen said was “the swooning U.S. dollar, which has become a proxy for the slowing American economy and the nation's humiliating lack of success arranging regime change in Iraq, banning weapons of mass destruction in North Korea and Iran and reducing its trade and budget deficits."

The fundamental reasons for owning gold and silver in the last five years have not changed, indeed most of them have become stronger:

Demand factors:

.A record and unprecedented US trade, budget & current account deficits.
.Rising oil & energy prices with the consequent inflation and gradual realisation that ‘Peak Oil’ is a reality.
.Overvalued, plateauing and falling property markets.
. Rising interest rates in the US and globally.
.Record consumer, mortgage and national debt levels in the US and much of the western world.
.Increasing pensions stresses from underfunding and the 'demographic time bomb' of retiring ‘Baby Boomers’.

The growing realisation of the long term impacts that global warming will have on all societies and economies as outlined in the Stern Report.

.Geopolitical instability and the ‘War on Terror'.
A depreciating and declining US dollar - the global reserve currency.

Increasing global investor demand for safe haven assets. Also, Central Bank demand for gold to provide currency backing and stability to monetary reserves.

Supply Factors:
.It is estimated that all of the above ground stocks of gold ever mined could fit into a 20 metre high cube. Gold is thus very rare and in limited supply.
.Gold production is stagnating and gold output in the leading gold producing countries continues to stagnate despite higher gold prices. This is leading geologists to wonder whether we have reached the point of peak gold production.
.It takes 10-15 years to take a mine to production and many mines have closed down in recent years.
.High energy prices make mining an expensive proposition.
Environmental legislation stymies mine development.
Many mines are in unstable countries and regions such as South America, Africa, the Middle East and Russia.
.Central banks sales have slowed and in some cases reversed; the Argentinian, South African, Russian and Chinese central banks are some of the more significant buyers of gold in recent months.

Investing in gold bullion has its tax attractions too. The EU harmonised the treatment of gold for investment purposes in 2000 with the introduction of the EU Gold Directive. It means that investment grade gold bullion for investment is now tax free throughout the EU. There is no VAT and gold bullion is stamp duty exempt (unlike property and equities) throughout the EU. The only tax applicable is capital gains tax which is applicable on the majority of investments.

Importantly, residents of the UK, can invest in gold bullion in their pension funds. As of April 2006 they can invest in gold bullion through their Self-Invested Personal Pensions (Sipps). US citizens can already do so in their Individual Retirement Accounts (IRA’s).

Gold bullion is allowed in a pension fund providing it is investment grade gold which is gold of a purity not less than 995 thousandths or 99.5% pure and that the bullion must be immoveable and stored with a secure and regulated third party. It cannot be taken in physical possession and used as a “pride in possession” asset.

The Perth Mint Certificate Programme, as the only government-owned and run gold certificate programme in the world, fulfills this criterion. It is the oldest operating mint in the world (established 1899) and has an AAA rating from Standard and Poor’s and as such is a legitimate way UK investors can invest in gold bullion within their Sipp.

Risk conscious investors have long known that gold is a sound investment choice. Gold is stable in times of global geopolitical instability and when economic uncertainty, recessions and depressions prevail. Used correctly, gold and silver can be highly effective components of a properly diversified investment portfolio.

Gold remains an under-appreciated, under-owned and undervalued asset. Most investors remain ignorant about gold and sometimes fundamentally misunderstand it. At the beginning of the 1970s, when gold was about to undertake its historic move from $35 per ounce to $850 per ounce for a return of nearly 3000% in the subsequent 10 years, the same observations would have been valid. The only difference between then and now is that the fundamentals are actually even stronger today.

While the U.S. is unlikely to go the way of Rome anytime soon, the significant long term fiscal challenges facing the U.S. as outlined by the Comptroller General, David Walker, suggest some diversification into gold makes sense.

Gold: The Anti-Dollar Cash Position-Lord William Rees-Mogg

Nils Taube has set up a new open ended investment company, S&Ws Taube Global Fund. At present almost 15% of the fund is in cash after the fall of the U.S. subprime lending market. It is heavily weighted in gold, with about 8% of the fund in gold bullion and 12% in gold shares. In all, just over 30% of the fund is invested in energy stocks, including oil and gas. Obviously, this balance of the portfolio shows that Mr. Taube has, once again, got major trends right. He will not have lost money in financial shares. He will have benefited from the rise in oil and gas prices and the gold price.

I have known Nils Taube, the London fund manager, for over fifty years. He has a unique long term track record since I first met him as a young partner in Kitcat and Aitken, a pre big bang firm of London stockbrokers. In the 1980s we were both members of one of Jacob Rothschild’s boards.

Last April, Nils, who is in his late seventies, set up a new open ended investment company, S&W’s Taube Global Fund, which currently has £40 million under management. The Financial Times devotes most of Ellen Kelleher’s Fund Focus column of October 24th to the current policy of the Taube Global Fund. This is an opportunity to study the current strategy of an outstanding investor.

Nils Taube has always been particularly good at making money in difficult periods. He has a temperament which could be described as one of realistic optimism, and has never been a “gloom and doom” investor. This makes it more significant that he has structured Taube Global so that the fund is strongly defensive.

At present almost 15% of the fund is in cash after the fall of the U.S. subprime lending market. It is heavily weighted in gold, with about 8% of the fund in gold bullion and 12% in gold shares. The FT quotes Mr. Taube as saying “we regard gold as an anti-dollar cash position”. There is an exposure to Japan and to energy stocks, including BP and Shell and United Tar Sands, the Canadian tar sands group. In all, just over 30% of the fund is invested in energy stocks, including oil and gas.

Nils Taube is at present suspicious of investment in banking and financial companies. He sets a high standard of liquidity for his investments so that he can trade in and out of them quickly. He is avoiding the shares of companies which rely on credit, “no matter how sound these investments may appear on paper”.

Obviously, this balance of the portfolio shows that Mr. Taube has, once again, got major trends right. He will not have lost money in financial shares. He will have benefited from the rise in oil and gas prices and the gold price. What I find significant, having known his investment response to the varying markets of over half a century, is that he still feels so cautious.

If he is right now, then the oil price is likely to remain high, and may go much higher, the gold price is in a long term bull market, yet the credit market will remain volatile and uneasy. Nils was getting his major calls right in the very difficult and inflationary decade of the 1970s. I suspect that he is again getting his calls right.

Commodity Market Cycles-Dr.Marc Faber

I have great sympathy for the view that over the last 200 or so years investments in commodities performed poorly when compared to cash flow-producing assets such as stocks and bonds. I also agree that, as the team at GaveKal suggests, "every so often, we experience a massive break higher in commodity prices in which commodity indices triple in less than three years," which is then followed by a period of poor performance.

Still, we need to ask ourselves why in the last 200 years, commodities, adjusted for inflation, were in a continuous downtrend and whether it is possible that something might have changed in the last few years, which would suggest that this downtrend is about to give way to a sustained out-performance of commodities compared to the US GDP deflator.

The other question is of a more near-term nature. Should commodities, having approximately trebled in price since 2001, be sold, or should we expect far more substantial price increases? I have to confess that I have little confidence that I can answer these questions satisfactorily. Still, the following should be considered.

In the 19th century, and for most of the 20th, industrialization was concentrated in a few countries, which for simplicity we shall call the Western industrialized world. The world's economy was at the time characterized by an abundance of land, resources, and cheap labor (certainly in the colonies and later in the developing countries) and a relatively limited supply of manufactured goods. At the same time, growth and progress was concentrated among a very small part of the global economy - either in the Western industrialized countries or among a tiny part of the population (the elite) in developing countries. In addition, there were hardly any other sectors in the economy where productivity improvements were as high as in agriculture and mining. These factors - abundance of land, labour, and resources combined with huge productivity improvements and limited demand from the then still small industrialized world - may, at least partially, explain why commodity prices failed to match consumer price increases for much of the last 200 years.

Remember that, in the first half of the 19th century, manufacturing was concentrated in England with a tiny population, while the British Empire could draw on the supply of commodities from an enormous territory. Then, in the second half of the 20th century, we experienced the socialist and communist ideology, and in India policies of self-reliance and isolation.

Commodity market cycles: Socialism and communism
As a result, about half the world's population remained largely absent as consumers of goods. (How many motorcycles and cars were there in the Soviet Union, China, India, and Vietnam 25 years ago?) But, while largely absent as consumers, people in these countries continued to produce raw materials and agricultural products. Therefore, I suspect that the removal of approximately half the world's population as consumers through socialism and communism may have been an important factor in the poor long-term performance of commodities compared to the US GDP deflator, and other assets such as equities.

Since the breakdown of communism and socialism, the world's economic fundamentals seem to have changed very importantly. Initially, the impact of the end of socialism was muted. Production shifted to China, but as had been the case with production shifting from the West to Japan, South Korea, and Taiwan between 1960 and 1990, rising industrial production in former communist countries largely substituted for production in the West. But over time, in countries such as China, rising investments and industrial production boosted real per capita incomes considerably and made way for a tidal wave of new consumers. In turn, these additional new consumers lifted industrial production further in order to satisfy not only the demand from their export markets but their own needs as well.

Thus, industrial production and capital spending increased further. This led to additional income and employment gains, further domestic demand increases and so on (multiplier effects).

Commodity market cycles: Shifting demand
In short, the opening of China and of other countries has permanently shifted the demand curve for consumer goods and services (for example, transportation) to the right and along with it the demand for industrial commodities and, notably, energy. Now, if all goes well in India (a big if, I concede), then the demand for goods, services, and hence commodities will continue to increase very substantially for another 10 to 20 years.

Indian oil consumption has just recently started to turn up. Should its demand now accelerate, as we believe it will do, it is very likely that China's and India's oil demand could double in the next eight years.

There are a few more points to consider. For much of the last 200 years, developing countries, where many of the world's natural resources are located, had trade and current account deficits with the industrialized world. These deficits were a constant drag on these countries' ability to accumulate wealth. But now, through its current account deficit, the United States is shifting around $800 billion annually to the economically emerging world.

This represents a huge shift in wealth from the rich United States to the current account surplus countries. That this shift in wealth stimulates their economies and consumption, and along with it their own demand for commodities, should be clear. (Rising domestic energy demand in Indonesia amidst falling production has turned the country into an oil net importer!) Now, for most countries a current account deficit the size of that of the United States would lead to some sort of crisis (for example, the Asian crisis of 1997) and then to a curbing of consumption. However, in the case of the United States, which is endowed with a reserve currency, trade and current account deficits are simply financed by "money printing."

Commodity market cycles: Global economic expansion
So, at least for a while (but not forever), the shift in wealth to the emerging world won't have a negative impact on America's economy and consumption. And, at least for now, rising demand and wealth in the rest of the world won't be offset by declining demand and shrinking wealth in the United States. On the contrary, the global imbalances arising from "over-consumption" in the United States have brought about a global economic expansion, which, while unsustainable in the long run, is nevertheless firing on all four cylinders at present. Simply put, the excess liquidity which the Fed has created - and which it is still creating, I might add - has led to a global and synchronized economic boom. (If money were tight, the asset markets wouldn't rise.)

The following point regarding the demand for commodities is frequently overlooked. In the developed countries, commodities account for a very small part of the economy. As a result, price increases for oil and other commodities have a very minor impact on growth rates and on consumption. However, in the commodity-producing countries (Middle East, Africa, Russia, Latin America), commodity production is an important part of the economy.

So, when commodity prices rise, their economies are, as in the case of the Middle East, turbo-charged. GDP per capita then soars and leads to a consumption and investment boom, which then increases these countries' own demand for commodities. This is particularly true for resource-rich countries that have a large population and also explains why, in the 19th century, when agriculture was still the dominant sector in the US economy, rising grain prices led to economic booms, while declining commodity prices were associated with crises. (In recent years, financial markets have begun to have a similar impact on economic activity as agriculture had in the 19th century: rising stock markets = boom; falling stock markets = bust.)

In sum, we could argue that the emergence of a large number of new consumers in the world following the breakdown of communism, expansionary monetary policies in the United States, which have led to a rapidly growing current account deficit, the US dollar's position as a reserve currency, which enables the Fed to create an almost endless supply of dollars, and new demand from the commodity producers themselves, have all led to a significant increase in the demand for raw materials.

I am not predicting here that, from now on, the demand for commodities will always outstrip the supply. In time, new technologies (in particular, in the filed of nanotechnology), which will permit resources to be used more efficiently, and conservation will curtail demand for raw materials. But until the effects of these factors kick in, a tight balance between rising demand and existing supplies could remain in place for quite some time.