International Man: Commodity prices go through cycles. Where are we in this cycle, and what do you think comes next?
Doug Casey: Commodities, historically, are the worst investment in the world. The price trend of commodities for the last 5,000 years has been down. In neolithic times, a caveman who found a piece of iron meteorite was the equivalent of a billionaire.
Since Day One, commodities have been in a long-term collapse in price relative to the value of human labor. I expect that trend to continue and accelerate with the eventual development of fusion energy and nanotechnology. The cost of most commodities will fall towards the cost of the software it takes to program self-replicating machines to extract them.
From a long-term point of view, commodities have been and remain a terrible buy-and-hold proposition. But within the long-term downtrend, there have been periods when they explode on the upside— almost always because of war or other forms of government action.
The public has been propagandized into thinking that we’re going to run out of commodities. They think we’re going to run out of oil, even as they’ve been taught to hate the companies that produce it. They think global warming will cause worldwide famine. They’re told all the forests will disappear, along with Bambi and his mother, there won’t be clean air to breathe or fresh water to drink. It’s a long litany. I have very few worries in that regard. The future should be and would be unbelievably bright and prosperous if we lived in an unregulated free market world. But it won’t be because the public everywhere wants the State to “step in” and “do something.” Excuse my making such a seemingly radical statement without much explanation; I’ve covered that ground elsewhere in some detail…
As I explained in a previous conversation, commodity prices generally rotate around their cost of production. And as technology improves, the cost of production always drops.
But occasionally, there are massive price explosions like in the 1970s, a decade of massive money printing, the Vietnam War, and price controls; commodity prices about tripled. And ten years ago, commodity prices about doubled, mostly as a consequence of the binge of money printing which was a response to the 2008 crisis. We’re going through another phase like that today. I expect it to be worse.
So at what point in the cycle are we right now?
Commodities are certainly no longer near the bottom, that’s for sure. I expect commodity prices to trend higher, but they’ll rotate around a new, higher baseline. In other words, “normal” soybean prices won’t be $6 but $12. Copper won’t float around $2 but $4.
International Man: How does today’s turbulent economic, geopolitical, and social environments affect commodity markets?
Doug Casey: Turbulent times make planning of all types impossible, or at least much harder. When times get tough— again, that’s almost always due to government actions like war, pogroms, taxation, inflation, and regulation—people will clamor for somebody to kiss everything and make it better. So expect to have a lot more government planning.
Perversely, when the government plans, it makes it harder and often impossible for productive entrepreneurs to plan. Government causes the problem, tries to solve the problem, and makes things worse. As Reagan once said, government isn’t the solution, it’s the problem. But not only was he incapable of solving the problem, it’s gotten much, much worse. The American public has since elected a regime that actively shares the philosophies and attitudes of the Jacobins in 1789 France, the Bolsheviks in 1917 Russia, the National Socialists in 1933 Germany, or the Maoists in 1965 China. That’s the environment that we’re living in today.
Let’s talk about producing commodities. Look at mining. It was once said that a good business was “like having a gold mine.” Gold mining was supposed to be wonderful. And it was.
Not today, however. Mining has been transformed. It’s no longer a matter of a couple of guys with picks, shovels, and a pack mule finding a bonanza. It costs millions of dollars to even look for a deposit in today’s environment, and the odds are heavily against success. If you do succeed, it’ll cost tens or hundreds of millions of dollars to develop it. Then hundreds of millions or billions to put it into production. Plus, even if you succeed, it can take over a decade to deal with permits, NGOs, and shakedowns from native groups. If resource companies want their stocks listed or want institutions as shareholders, they need ESG committees mouthing counterproductive nonsense about diversity and inclusion.
The bottom line is that today’s political and social environment has made production much harder, more costly, and results more uncertain than ever. Essential commodities may become unavailable, as with Russian fertilizer. The cost of the three basic fertilizers— potassium, phosphorus, and nitrogen— has tripled in the last year.
Producing commodities is a guaranteed legal and public relations nightmare. NIMBY (not in my backyard) attitudes are everywhere. Nobody wants a production facility anywhere near them. No wonder most entrepreneurs would rather build an “app” than a mine.
Commodity production today is a highly capital-intensive business, which is a huge problem when dollars are allocated politically. Furthermore, as governments everywhere destroy their currencies, less capital will be created in the first place. Without capital, you can’t buy machinery or make the investments necessary to produce efficiently. Without capital, a country can be reduced to beating on the earth with sticks— like Zimbabwe or Haiti.
Technology, free markets, and capital make things better. The State makes conditions worse. The State, and by that, I mean the institution itself, is a danger to civilization itself. That’s more true than ever in a high-tech, complex, highly populated world.
International Man: In a desperate attempt to paper over their problems, governments have printed trillions of new currency units, brought interest rates to below zero, and bailed out failing institutions.
But those gimmicks have now been exhausted, and inflation is spiraling out of control.
Could a historic credit collapse be on the menu as soaring prices pressure the Fed to tighten? What does that mean for commodities?
Doug Casey: Regardless of what the Fed does at this point, interest rates have to go higher. That could easily result in massive defaults in a world where scores of trillions of debt are hooked together. That would destroy both the lender and the borrower.
People will not save money to create new capital when all they’re getting is between 0 and 2%, while currencies are losing value at 15% per year. It’s a real problem in a world that lives on debt created by central banks. It becomes pointless, even foolish, to save for tomorrow; it makes more sense to consume wildly and live only for today.
We’re headed towards much higher levels of inflation. But along the way, we could have a severe credit collapse—a deflationary depression similar to that of the 1930s. The authorities in control of monetary policy actually have no idea what they’re doing. The Fed’s economists are almost as clueless as those in the old Soviet Union. So they’ll print up even more fiat money.
Meanwhile, economic activity will become increasingly chaotic. Some will spend money like drunk sailors to get rid of it. Others will economize in every way possible, hoping to stave off bankruptcy; they’ll tighten their belts and use less of everything. Some commodity prices will fall because of a collapse of consumption, while others will skyrocket. All in, there will be less production and a lot of volatility.
For instance, recently, because of war in the Ukraine, wheat—the most important grain for human consumption—has had days of limit up moves on the commodity markets followed by days of limit down moves. It’s now trading at a new high range, about $10 a bushel. That’s not a huge problem for most people currently reading this, but absolutely life-threatening for poor Egyptians. Egypt is terminally unstable and the world’s largest wheat importer.
In all of this, the State is the problem. Humans left to themselves, with all their faults, try to produce more every year. Not from altruism, but because it’s in their personal best interest. However, when you insert the State as a solution, chaos results. Again, the State’s only products are wars, pogroms, taxations, confiscations, inflation, and controls. The fact that humans all look to the State as a savior tells me that the average IQ of the human race isn’t 100, but more like 70— the number that designates a moron.
International Man: What are some of the most prominent examples of governments distorting commodity markets today, and why are these distortions a gift to astute speculators?
Doug Casey: The classic distortion of a commodity market took place when the US government first arbitrarily raised the price of gold from $20 to $35 under Roosevelt in 1933. It then suppressed the price of gold at $35 until 1971. That was a classic example where the government stepped in to make prices too high and then attempted to keep prices too low. The gold price ultimately exploded from $35 in 1971 to $800 in 1980.
But there are lots of other examples of governments “stepping in,” as they like to say.
For instance, during the 1930s, when many were underfed and even starving in the US, the Roosevelt Administration had hogs slaughtered and buried, and milk poured into the gutter in an attempt to raise commodity prices—as if higher commodity prices were just what people with a low standard of living needed. Government intervention into the market always tends to destruction.
The lockdowns brought on by the recent COVID hysteria were largely responsible for the price of oil collapsing in April 2020. For a while, it was minus $37 per barrel on the futures market. Demand dropped so quickly that the storage facilities for oil were overloaded, and they literally had no place to put the stuff. This has happened in the past with other commodities. Hogs have actually traded, briefly, at negative prices. You’d think it would be metaphysically impossible to have negative prices for commodities, just as it would be metaphysically impossible to have negative interest rates.
But anything is possible— for a while— in the make-believe world of government intervention. On the bright side, it creates great opportunities for speculators.
International Man: What specific commodities do you see as speculative opportunities today?
Doug Casey: As we write this, the VIX (the Volatility Index) is 22 and trending down.
In times like these, when it gets under 20, I want to go long because the likelihood of some disaster presenting itself is very high, and the likelihood of a return to stable, mellow times in the near future is extremely low. I’m betting on volatility verging on chaos in today’s world. It’s just a question of when you enter the trade and, generally speaking, under 20 is a good figure.
One thing that I think you can do with confidence for the next several years is short bonds. There are always anomalies and exceptions— like some convertibles on resource companies—but you shouldn’t own bonds when interest rates are rising. And I think they will rise for years to come. I sell out of the money nearby calls against them in the futures market. That’s my preferred approach since I’m not a full-time commodity trader watching the screen all day.
Most people buy commodity options. That makes sense at major turning points when they’re extremely high and headed down or extremely low and headed up. But when you’re in a twilight zone, like we are today, I generally avoid buying options. I usually prefer to sell options, especially when time premiums are high, as they are now. That way, time is on my side.
When you buy options, you have to be very right in order to make money because you’re fighting the time premium. When you sell options, you only have to not be very wrong. You’re acting as the house in a casino. You’re acting as an insurance company. The downside is that you can’t do it unless you’re well-capitalized. This may not be practical advice for most people for that reason.
Looking at metals, I think gold is at a new equilibrium level relative to other things. It’s no longer a super bargain as it was back in 2001 when it was selling at $250 an ounce—less in real terms than it was selling for in 1971 at $35 an ounce.
Now, at $1,900 or thereabout, it’s a reasonable value relative to everything else in the world. It’s no longer a great speculation at current prices. No matter. I’ve always bought gold mainly for savings, prudence, and insurance. I continue to do so. At some point, soon, we’ll have a massive monetary crisis that will take the metal much higher. But I likely won’t sell until I see Slime or Newspeak magazines featuring a golden bear tearing apart the NYSE.
Silver is a more interesting speculation right now. It’s a much smaller market, much more volatile, and actually quite cheap relative to gold.
Even at $4.50, where it is now, Copper is a good long-term play if only because few new mines are being discovered and even fewer are financed. Spending billions to put a new copper mine into production is simply too risky in a world of ESG and out-of-control States. Most people are bullish on it only because of the perceived demand side of the equation, believing we’re going to a Green economy—I’m not so sure.
Despite continuing advances in biotech and productivity, I tend to be bullish on grains because they’re grown in gigantic monocultures with massive energy and fertilizer inputs. Something major could easily go wrong in a chaotic environment. And at some point, either a natural or manufactured pestilence could attack many thousands of square miles of grain land—much the way the African swine flu devastated hog herds a year ago. That said, it’s hard to be a wild bull right now after they’ve all risen 50% or more in the last year.
Tropicals like coffee, cocoa, and sugar are totally different. As the standard of living goes down in the West and the world at large, people will cut back on them because they’re not essential. At the same time, farmers typically don’t make much more than subsistence money on them in the poor tropical countries where they’re grown. There’s a long-term trend for farmers to pack their bags and move to the city where there’s opportunity. These are tough markets to get a grip on right now— none of them are “cheap.” But there’s been so much chaos recently. I’m unsure what their costs of production may be.
Bottom line, I can think of nothing right now that’s a sure thing, equivalent to buying gold or silver before 1971, with the possible exception of shorting T-Bonds.
Something will come up. When it does, I’ll try to draw our reader’s attention to it.
Reprinted with permission from International Man.