Demand destruction and asset deflation knock down inflation and commodities

After many months in denial, the world now believes that we are in the midst of the worst economic downturn in several decades.
Since last December, demand destruction born of the global contraction has been hammering commodity prices across the board. Falling prices have been significantly pulling down inflation expectations.
Inflation Risk Receding Quickly, 2007-2008
With more of this downturn before us, and since inflation is a lagging indicator, I think it likely that inflation and commodities including gold may fall for some time yet.
This should be a good thing. Inflation was uncomfortably high the past few years. Cheaper commodity prices will help the world economy re-stabilize. In the meantime however, the re-stabilizing of commodity prices will prove very destabilizing for producing nations that are now caught unprepared.
This is human behaviour up to its epic tricks. For the past 5 years, commodity and oil producing countries like Russia, Venezuela, Iran, and yes Canada have been living in a veritable fool’s paradise. Cash was pouring in and governments and their citizens took good times for granted.
Commodity prices soared with credit-fuelled expansion from 2001 to 2007, oil moved from $12 a barrel to $147, copper from .67 cents a pound to $3.90, and gold from $350 an ounce to $1,000. Notwithstanding these awesome price gains, many saw more increases as a continued sure thing. As an example, in drown-proofing expansion plans, many producers used $60 to $70 a barrel for oil as their worst case scenario.
In back of the envelope projections, some individual companies factored in $80-$90 oil as the baseline break even for future plans.
Today with oil testing $70 a barrel, copper at $2.00 a pound, and gold at $770 an ounce, world dynamics are now wildly in flux:
“Now, the producers are experiencing a reverse oil shock. As revenue went up, government spending went up and expectations of a continuing windfall led to greater and greater ambitions. Now they are finding how integrated they are into this globalized world.” See: 3 oil countries face a reckoning.
All of this is making an utter mockery of prior decoupling hopes.

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6 Responses to Demand destruction and asset deflation knock down inflation and commodities

  1. Anonymous says:

    Is Gold traded in lock-step to inflation where it goes up when inflation is up?
    We have inflations in the 80s and 90s, but Gold drop from high of 700s to low 200s.

  2. Anonymous says:

    You are inspiring

  3. Anonymous says:

    sorry, didn't mean to do that.
    what i'm trying to say is that gold isn't just a hedge against inflation. it's a safe-heaven for economic/world disasters. up to now, gold has been treated like a inflation hedge, but soon when ppl start realizing the massive paper printing by every gov't recently is an act of destroying their fiat currency, gold will be treated as safe-heaven because of its intrinsic value. and it will price like one — above $2000.
    ms. danielle was only looking at gold as an inflation hedge from this post, which is myopic.

  4. Anonymous says:

    actually inflation and interest rates fell throughout the '80's and '90's. These factors were key supports to the best and smoothest equity bull market in history over this period. And gold fell throughout. D

  5. Anonymous says:

    Danielle is myopic. I see. She has not lost her clients any money from Oct. 2007 untill today, actually has made them money. Gold at $2000.? I can only imagine how terrifying it is to open your account statements every month, as it seems you base your investment decisions on hope, conjecture, and wishfull speculating. I will continue to heed the advice, and opinions of Danielle, not yours, whoever you are. I wish you would identify and continue to post your investment opinions. I will do the opposite of what you suggest.
    Ricky

  6. Anonymous says:

    I read where recently a person could not buy gold coins — sold out at coin shops. I bet the coin shop owners are smiling given that gold has declined by 33%
    But, at the same time VIX hit a record 89? Hmmm something is amiss here.
    People that lived through the depression aren't around to provide a sense of how far things may fall. Buying physical gold during a spiraling deflation seems proof we haven't a clue what to do.
    Have you seen Chuck Schwab in his the ride-it-out ad?
    it-happened-too-fast-for-me Ben Stein is wining also.
    What bothers me most is Warren Buffett's “I'm buying” What if he isn't JP Morgan?
    The rate of reversing the carry trade is breath taking, eg AUD/JPY down 46% in TWO Months….back down to 2001 levels.
    We don't know how to handle runaway deflation. US government is sputtering about aiming the money hose at anything that asks, now it's Insurance companies…
    I see the Loonie is back to 1.27, a level to encourage me back up to enjoy your land of “rocks and trees.”
    rdub

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