Radical Noesis - Thinking outside the box

The global supply of aluminum has been extremely tight and as energy prices rise it is unlikely that there will be a glut of this metal anytime soon. FTW has previously reported on China's commodity buying binge over the last two years. Ultimately Peak Oil is going to send commodities on a seemingly endless climb upward: real goods will gain value while paper wealth such as stocks, bonds, and fiat currencies lose value.

A similar point was recently raised by The NY Times regarding commodities:

"We're going through a long-term recovery from stupid oversold levels," said Fred Sturm, who manages the Ivy Global Natural Resources fund. "Prices of many of these commodities were unsustainably low." In the late 1990's and early 2000's, he pointed out, gold and oil traded at nearly 20-year lows after having fallen by more than two-thirds.

The depressed prices helped to force commodity producers to merge -- Alcoa and Reynolds in aluminum, for example, and Exxon and Mobil in energy -- and to take other steps to improve their finances. That drove the first move in what he expects to be a three-stage rally in commodity markets.

The last stage, he predicted, will be "a true scarcity phase when Mother Nature slaps us in the face and grabs our attention and tells us we're running out of commodities like oil when people keep wanting more."

But that's well in the future, Mr. Sturm said.¹⁶ [emphasis added]

How close are we to a "true scarcity phase" for commodities? The answer to that is directly correlated to the scarcity of the most important commodity of all, oil, which Fred Strum seams to believe is "way off in the future" despite substantial amounts of data that suggests otherwise.

To produce, process and refine commodities you need abundant and ever-growing reserves of energy. Once those reserves stop growing (Peak Oil and Gas) demand will outstrip supply, energy prices will rise, and the cost of all other commodities will follow upward.

Ironically it is this phenomenon that has sparked the recent boom in renewable energy. Rising oil and gas prices have made renewable energy competitive with traditional energy sources, but that does not change the fact that renewable infrastructure requires oil and gas to be produced, shipped, built and maintained. Whether we like it or not, oil and gas are fundamental to renewable energy.

Hedge Funds

But the economics does not end there - enter the casino.

Hedge Funds are a way to leverage money or protect money within the never-ending growth paradigm of global capitalism. February saw drops in commodity prices because many hedge funds pulled out of their long positions to liquidate profits.¹⁷

Let's use one commodity as an example: gold. In the first week of February gold hit $570 an oz. before funds pulled out of the yellow metal,¹⁸ bringing the price down as low as $540 for a short time before bouncing up to $563 by the end of the month. When funds buy and sell commodities they are trading paper securities, not the physical commodity itself (such transactions are known as derivatives). And when they buy large amounts of these securities it has a big impact that blurs the true fundamentals of the market by increasing volatility. Fund managers love market volatility since they can make fast money on both rising and falling prices.

What is truly amazing is that most of these funds are fully automated, requiring no human input when making the decision to buy or sell. The automated systems detected market signals that triggered a massive sell-off in gold. Once one system started to sell many more funds joined in simultaneously. This trend in-and-of itself was enough to cause gold to drop in price, and thus we saw $570 drop to $540.

But the drop was only temporary. In today's gold market it was seen as nothing more than a momentary blip on the radar screen. When these macro funds sold their holdings in gold, traders (real, live people) who buy and sell based on market fundamentals bought gold at the depressed price because demand for gold is insatiable. This set off another set of market signals that caused the very same automated funds to start buying the commodity they just sold. As gold rises higher in value we will see more of this volatility with quicker turnaround.¹⁹

In "The Big Dipper," Dan Norcini does an excellent job of describing how this phenomenon is triggered and what it looks like in the rearview mirror for both gold (a precious metal) and copper (a base metal).²⁰

When big funds move big money they send waves throughout the market making it difficult to see what trends will be long or short term. But most analysts agree that there is money to be made by investing in commodities this year and beyond.²¹ Catherine Austin Fitts, former Secretary of HUD during the George H. W. Bush administration and resident FTW economic guru, has said, "2006 will be a good year for commodities."

But she cautions that those who don't know what they're doing could be taken for suckers if they carelessly throw their money into the casino. Market volatility performs a unique magic trick with the novice investor's money - now you see your money, now you don't.

Regardless of what happens within the casino this year the bottom line is clear: exponential growth cannot continue in a finite world racing toward Peak Oil. Once the demand for hydrocarbons starts to outstrip supply we will see long-term price increases in all real goods (commodities) as paper wealth decreases. A quick review of the mainstream news reports referenced in the endnotes of this report shows this trend is happening now.

Securing commodities for massive renewable energy projects will be competitive and expensive and may not be profitable. In such a reality, how many CSP installations will be built? The American military-industrial-complex may ultimately have the final say in the matter since they have funded much of the R&D.

These installations hold absolutely no hope of mitigating the coming energy crisis. There is no free lunch - over-consumption cannot continue and we need to stop desperately praying that it can. To continue doing so is delusional, dangerous, destructive and gluttonously selfish.

Renewable energy works very nicely within sustainable systems, but not within a suicide-economy of exponential growth and over-consumption.