Commentary:

Raw material prices - it's not all about oil

From an editorial at Financial Sense Online published January 14, 2005:

Since our last update, some metals prices - gold and silver in particular - have been off, but some others keep pushing ahead. Last month we mentioned the stunning rise in the price of molybdenum. It was then trading for $32 per pound, up 1,262 percent in three years. But "Moly" traded last week at $35 per pound.

Another example of a metal that continues straight up is selenium. That's one of those toxic metals that can be so plentiful at times that it becomes hazardous waste. It is then a disposal problem for the mines that produce it as a by-product. Last week, however, selenium saw a high of $50.00 per pound. It averaged $2.76 in 1999. Also, and to a somewhat lesser extent, we are experiencing dramatic price rises for tellurium, and tungsten.

While these metals have demonstrated continuing, even frenzied price rises, most all metals have been very much higher in the last couple of years. Still, current prices do not reflect anything much other than the early days of an unfolding bull market with years of "legs" on it. Demand for many raw materials continues to rise, and suppliers are years from being able to catch up, if ever. That means rising prices will continue into the foreseeable future.

Why is this important?

Multiple reasons, not the least of which are two of the origins of the price increases.

One is the decline in the value of the dollar. In the current world economy, the dollar has lost absolute hegemony, so when the dollar declines, prices for raw materials no longer stay constant in dollar terms. Instead the prices rise.

Yet, it appears that US economic policy regarding the value of the dollar is still based upon the dollar having economic hegemony. Is this wise?

A second reason prompts even more troubling questions. Again quoting from the January 14, 2005 editorial at Financial Sense Online:

The overriding influences here are related to the stunning growth being experienced by China and India, though that is not obvious to many observers. They are replacing the United States as the largest consumers of natural resources, and, while this is happening, industrial commodities are in higher demand than can be supplied, with many types of materials reaching or exceeding "peak" production in planetary term. Therefore, we have to expect that there are not enough raw materials available to feed Asia's growth without also taking something away from the formerly dominate producing/consuming nations who can no longer compete as effectively for markets and resources.

One can argue that China and India replacing the United States as the largest consumer of natural resources merely reflects the shift in the US economy from manufacturing to services. However, that view may be too sanguine.

The major powers of Europe were blindsided by the rise of the United States in the late 19th and early 20th centuries. The new power wasn't taken seriously until World War I, and even then the "Great Powers" of Europe did not see their own decline in relative terms.

Are we being blind to the rise of new powers in the late 20th and early 21st centuries?

---

Thanks to Barb at Righty in a lefty state for providing the link to the Financial Sense Online editorial.