Are We Headed For The Middle Ages?

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Commodities, Global Trade

I read a fascinating article the other day by Ambrose Evans-Pritchard for the Sunday Telegraph The Sunday Telegraph (the slightly stuffy Sunday edition of Britain’s best quality paper the Daily Telegraph). My father worked for them for 20 years and banned the reading in our house of any other newspaper  — a rule that still holds sway to this day. Anyhow, the article was regarding the gold price and where the true value should lie. Mr Pritchards’ suggestion was that due to a combination of steadily dwindling world production, rising consumption and the flight to a safe haven as governments devalue their own currencies by flooding the world with cheap money we may be heading for a Gold price closer to $3000/ounce. Apparently this was the price of gold for much of the Middle Ages, adjusted in real terms, only falling when Spain began to flood Europe with gold plundered from the Inca and Aztec civilizations. Since then, at least for much of the 1800-2000’s it averaged $630/ounce in real terms.

Gold has been one of the hardest of the metal prices to call during the last 2-3 years. It has clearly benefited from the relationship the commodity funds put between oil and gold, typically buying 35% gold for every 65% investment in oil. As oil has been bid up so has gold.Needless to say not everyone supports Mr Pritchards’ ideas (tongue in cheek as they are) UBS’ John Reade suggests gold is overvalued by some $150/ounce but that in itself doesn’t mean it will fall. Over the short term it is driven by sentiment not fundamentals.

And just to show how the best research departments can get it wrong Goldman Sachs advised clients in November to short gold following which it moved up $60/ounce! So while a return to the Middle Ages is unlikely, consol yourself with the thought that it would appear that even the best minds in the business can’t agree on where gold will be heading next.

–Stuart Burns

A wise colleague once told me the first time you hear something, it’s a data point. The second time you hear it, it’s a line and the third time you hear it, it’s a trend. Said differently, the demand for the world’s precious raw materials is going to increase and so too will the prices.

Though we stand by our 2008 metals predictions (including copper) – the fact remains the underlying data may be pointing to a very different financial picture long term. Consider the following:

  • Tata Motors just unveiled their $2500 car for the Indian (and other) markets
  • Examining per capita “consumption rates” as recently published in the The New York Times by noted professor and author Jared Diamond, “The estimated one billion people who live in developed countries have a relative per capita consumption rate of 32. Most of the world’s other 5.5 billion people constitute the developing world, with relative per capita consumption rates below 32, mostly down toward 1.” But, “China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.” And we haven’t even talked about India or any other developing country.
  • According to a March 2007 article quoting Sanford C. Bernstein, an investment management firm, a hybrid car, “costs US$4,500 to $6,000 more to build than a conventional vehicle.” Some of this cost is due to the added metal content for a hybrid vs a regular car. For example, there is more copper used because of the electrical motor and the larger the motor, the more copper required. In addition, more nickel is also used in hybrids than in conventional cars. And, according to this same article, the automotive industry accounts for 5% of global copper usage.

And the data goes on and on…though the metal content of cars has historically been dropping as a % of the overall content of a car (and electronics has risen), metals consumption overall will increase exponentially as more of the lesser developed world purchases cars.

Of course all of these data points examine the demand side of the equation. We’ll come back to the supply side in another post. But consider this odd trade agreement as reported in The New York Times between Chile and China hint: Mandarin lessons were part of the accord. China is busy brokering long term raw material, in this case copper, supply arrangements. The long term writing may be on the wall.

–Lisa Reisman

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