Will Commodities end 2012 higher or lower than they started it? It’s a difficult questions because the forces of inflation & deflation are raging and it’s tricky to say which one will be on top at the end of December. We’re in the middle of a series of predictions on what will happen in the economy in 2012 and beyond. Today, we’ll try to answer the question of commodities and explain why we lean towards commodities ending the year lower.
First, we want to differentiate gold, silver, & oil from other commodities since we believe these will probably end the year higher (as you’ll see in the coming posts.) Of course, every commodity is different. If there’s terrible weather that affects a main area of production for a particular crop, that crop’s price will probably shoot higher.
That said, from a bigger picture view, many commodities move together these days based on two primary sets of factors. On the side of higher prices, are the factors of millions of people leaving the lives of the peasant and becoming middle class consumers who are able to enjoy more than the bare necessities of life. This is happening in great numbers in emerging markets around the world. Those that see the economy getting better would also argue that those in the West will also be consuming more, but this is a smaller factor (and also one in which we don’t agree.)
The other driving factor for higher prices is the massive printing of currency units that is going on throughout much of the world right now. All the largest economies are printing money at a rate which acknowledges the paper does in fact grow on trees. However, the producers of commodities, whether they be crops, livestock, or materials, can not exponentially create new produce at the same rate. This means that each unit of commodity production will demand more units of currency…thus higher prices..
The opposite argument is that the economy could crash and this would decrease demand for these goods and thus the prices of each could crash as well.
The other outlier to consider is that because of the MF Global implosion and the US government’s role in protecting the big Wallstreet banks such as JP Morgan Chase. It would have been more correct legally & morally for the US gov to protect the US citizens (many of which are small commodity producers) who had their funds stolen. However, since the US government ignored the law and determined the futures broker would be tried in equity broker court to favor the big banking establishment, many investors are much more nervous. It’s always possible that people refuse to trade in these markets and the illequidity leads to extremely crazy things happening which are difficult to predict.
With today’s modern exchanges, the market pushes prices in the direction that the market expects events would carry them over time. Thus markets react and rebound very quickly depending on the changing of events.
While we do believe that commodity prices will head much higher in a reasonably short number of months, it could easily be more than those necessary to get us out of 2012. We think there will be a massive crash that comes to most markets in 2012. Of course there are always rebounds and it’s hard to know which month these things will happen, but since we’re guessing, we’re going to say that the crash drags most commodities down and they stay that way through the end of the year. We fully expect the Fed along with many other central banks to crank up the printing presses which will drive prices higher, but we’ll guess that that doesn’t happen by the end of 2012, although it certainly could. In the next few posts in this topic, we’ll talk about the slightly different stance we have on gold, silver & oil.
This is the 14th post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 
European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash, 12) War with Iran, & 13) Jewish Perspective on Iran.