Who's to Blame for the Commodities Boom?

by: Toro

As we enter the formative stages of Bubble 3.0, also known as the nascent commodities bubble, some are pointing their finger at Wall Street.

Speculators are likely the first to be blamed in any discussion of today's soaring commodity prices.

But the people who profit without taking delivery of a single barrel of oil, ounce of gold or bushel of corn may not have taken these assets to record highs without the encouragement and products of Wall Street banks and firms, according to some.

"The ugly truth is that the securitization of commodities has eased the way for money flows to raise commodity prices beyond that which the current fundamentals of the global economy can sustain over the long term," Michael Frankfurter, a fund manager at California's Cervino Capital Management, told a conference on base metals in New York last week. ...

There is no question that speculative inflows are helping drive commodity prices, but blaming investor interest for rising commodity prices is akin to blaming the symptom and not the cause.

Simply put, if there were not reasons to pour money into commodities, investors would not be doing so.

Investors are stampeding into commodities for both fundamental reasons - the emerging markets, lack of supply growth over the previous decades - and for economic reasons - the debasing of the currency by the Fed and the government. They were not pouring money into commodities a few years ago. But now, with the government on a deliberate path to erode the savings of investors and purchasing power of its citizens, people are looking for ways to protect their wealth.

Would gold be at $1000 had the Fed not looked the other way during the tech bubble by policy, responding only after the bubble collapsed by taking the Fed funds rate down to 1%, igniting a housing bubble with the predictable aftereffects? And would gold be where it is had the government not increased the deficit by cutting taxes and increasing spending?

Surely, commodities would be higher than they were five years ago even if the government had run more responsible fiscal and monetary policies. However, the reckless policies of both the Federal Reserve and the federal government have been primary drivers behind the soaring commodities prices, and the government's complete unwillingness to take any responsibility for the current situation is an utter disgrace.

Disclosure: I am long gold, Canadian energy income trusts, coal stocks and sugar futures.