Lately the mainstream pundits have been focusing on demand destruction caused by the weakening world economy. They claim that commodity prices will continue to decline for the foreseeable future. They claim that we have witnessed the bursting of the commodity bubble. In the coming months they will be sadly mistaken as massive supply destruction more than offsets any slowing demand.  Investors who ignore the propaganda of the mainstream media now have a historic opportunity to position themselves for potentially massive gains.

Investors who are overly focused on demand destruction are missing the bigger picture. We are in a world where population growth, massive monetary expansion and geopolitical war will lead to soaring commodity prices regardless of any slowing demand.  First of all there are times where there is no correlation between economic growth and inflation.  Monetary expansion is the sole cause of inflation. The evidence can be seen in a study entitled , "No Money, No Inflation---The Role of Money in an Economy." The longer term correlation between monetary expansion and inflation is about 99 percent. It takes about 6 months on average for the effects of monetary expansion to be absorbed into the markets.

The International Energy Agency, for example, estimates that world demand for crude oil is still growing by 2.1 percent per year. At the same time oil depletion is at the unprecedented levels of 9.1 percent. At today’s commodity prices, companies continue to scale back production and exploration because of inability to make profit. They continue to shut down mines and cap off wells. This is happening on a global basis.




The gap between estimated and the actual future production is sure to widen again. Commodity producers have also been forced to cut back because of the tight credit conditions that persist worldwide. Many projects that do not have adequate funding may be shut down until credit becomes more available or until commodity prices are much higher. 

It appears that many traders are focusing only on the supply story, caused by demand destruction, and are ignoring the other half of the equation. While it is true that demand growth has slowed for most commodities, overall rates of growth are still positive for many commodities. In our analysis it appears that supply destruction in most major commodities will more than offset any lack in demand.  Major buying opportunities lie ahead, not just for the inflation hedges, but also for industrial commodities as well.


 


 

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If you are interested in positioning yourself for the major supply shortages that lie ahead or would like more information on this article, please feel free to contact me 1.877.377.7936 or email at jared.irish@archerfinancials.com.

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