Just a Pause for the Commodity Bull Market in the Collapse of Bretton Woods and the Pax Americana

The author of this thoughtful piece rests his argument for a resurgence in commodity prices on three pillars: oil is the heart of the commodity price bull market, oil is peaking in production, and overall demand for all commodities will continue to stress against supply levels even with reduced demand for the short term. Commodities trends and production increases are long cycle phenomena.

We have come to a similar conclusion but from a different path. The eye of the commodities storm has not been oil, and peak oil, but rather a collapsing international trade system based on the US dollar.

The heart of the problem is that trading increasingly worthless dollars for hard goods has been a nice protection racket with an amazingly long run under the Pax Americana. The non-G7 countries will stop accepting this arrangement, and the world will adjust.

The markets are searching for a replacement for the Bretton Woods II arrangement of dollars for oil and military protection. Increased demand and peaks in supply will merely accelerate and intensify the storm.

We think that this is already well underway, thanks in great part to the Clinton-Bush Administrations and their careless disregard for the stewardship which the US accepted with the world's reserve currency. The heightened sense of risk and volatility is because the world's markets do not yet see a viable, sustainable solution.

A new equilibrium that will underpin international trade will be discovered. But given the length and breadth of the status quo the seismic shocks of the adjustment may be quite convulsive, taking down more than a few major institutions. The epicenter for this global earthquake is somewhere between New York and Washington DC.


Commodity Bull's Not Dead, Just Resting
Vijay L Bhambwani
Daily News & Analysis - India
August 23, 2008 03:57 IST

Once the deliberate downward pressure on these assets eases, there will be a resurgence in prices

Recent days have seen an intense debate within the analyst community on the hot topic of the year — commodity prices. Many have started writing obituaries for the commodity bull and pronounced an end to the ascent in commodity prices. The impact on the corporate sector was advocated to be salutary and it was widely expected to signal an end to the woes of the equity investors....

I expect the post-US election year to be particularly tough on the global energy front as the supply-side constraints choke the optimists. Once the deliberate downward pressure on these hard assets is eased, there will be a resurgence in prices.

I am afraid the following rally may just surpass the recent one. In my humble opinion, the commodity bull is just taking a breather, forget his obituary for now. The future shock will lie not in rising commodity prices, but in not preparing for it.