-Featured Article
By Charles Sizemore
Harry Dent and many, many other analysts over the years have written volumes about the nature of cycles in commodity prices. To summarize those volumes in one paragraph, commodity bubbles are always self defeating. Once a valuable commodity becomes prohibitively expensive, market mechanisms correct the imbalance in a couple of different, complimentary ways:
- High prices lead to reduced usage (setting the air conditioning at 80 degrees instead of 75, for example)
- High prices lead to efficiency drives (think insulation in homes and increased fuel efficiency in cars)
- High prices lead to substitution effects (switching from gasoline to diesel in your choice of car or from steak to chicken at your dinner table, for example)
- High prices lead to new sources of supply being searched for and found (consider Brazil’s enormous recent oil discoveries in the Atlantic)
These adjustments do not always happen overnight, of course. Depending on the rate of technological change and other factors, some supply/demand imbalances can persist for years or decades, and sometimes the points above can conflict with each other. One example is rubber. Click here to continue…