Michael Masters Report: Not the Whole Story on Commodity Prices

Among many other things that Michael Masters might have you believe is that soaring commodity prices are somehow unprecedented in history. The chart below was an integral part of his congressional testimony (.pdf) last week when he asserted that institutional investors "are one of, if not the primary, factors affecting commodities prices today."

Look at those level prices up until the point that institutional investors starting moving money out of stocks and bonds and into commodities. That's some pretty convincing chart-work there.

Get the pitchforks! We'll teach those "index speculators" a thing or two.

But didn't commodity prices rise sharply back in the 1970s?

Apparently not - at least not according to the "S&P GSCI Spot Price Commodity Index", an index that is new to me. The venerable CRB Index seems to tell a little different story about commodity prices over the last 40 years.

In fact, that move from 1972 to 1980 makes the recent move look a little tame by comparison. Note that the chart above is a year or so old - the CRB currently stands at about 430 which is a little over double the level in 2002.

By comparison, the index more than tripled from 1972 to 1980.

Maybe it's just the index - "spot" GSCI versus CRB - that accounts for such a big discrepancy. Using data from Dr. Craig Israelson's paper The Benefits of Low Correlation, this is what a $10,000 investment in the "non-spot" GSCI would look like since 1970.

That looks like a pretty steady progression over the last 40 years with a big surge over the last decade.

But, as I learned long ago and discussed in "Fun with multi-decade charts", for a single curve going back almost 40 years, you really should use a log scale.

Wow - that's a completely different curve than the first one in this post - the one that was presented to Congress last week as "proof positive" of the undue influence of speculators on commodity prices.

You know, I've got a couple speaking gigs under my belt now, maybe I should see if I can present my data before some Senate panel. Maybe we can talk about Alan Greenspan and fiat money while we're at it.

Note: There will likely be more on the Masters report later in the week.

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UPDATE:

Here's the CRB "spot" index going all the way back to the 1960s - it tells much the same story as the CRB Index above. When it rises another 30 percent or so we can all say, "Gee - that's as big as the increase in commodity prices from back in the 1970s (when there were no index speculators)".

Comments

[Myron Shlapak:]

Which came first, the Wellhead price increases or the Futures price increases?

As I recall, in the past there were few if any House Flippers yet housing prices still rose, but at a more moderate pace. Then all of a sudden they soared to extreme heights in a very short duration.

Now with the Flippers mostly gone house prices are declining and a glut of vacant buildings and lots dot the landscape.

I read recently that Spot oil is below Futures prices, Contango.

Should the speculators have higher margin requirements? Should potential homebuyers be required to make a substantial down payment? We may not want to answer the first question but we do know the ramifications of not enforcing the second.

2008 May 27 05:42 AM

[Adam K White:]

The GSCI spot index is composed of the spot prices of the 24 commodities in the GSCI. The GSCI index includes the spot index plus "roll yield" which you get from constantly rolling your futures position in backwardation and the interest that you get from your margin.

For 30 years commodity prices have not kept up with inflation because the marginal cost of production (long term equilibrium price) has been coming down over time. It does not make sense when talking about commodity prices to include the interest on your margin or the amount you get from your trading strategy. By the way the CRB is also based on futures prices.

The footnote that accompanies Mr. Masters statement that commodities have increased more than any time in U.S. history is taken from data in Frank Veneroso's report where he gives a chart dating back to 1749.

www.venerosoassociates.../
The report is on the home page, and it's page 5 or 6 in the report.

2008 May 27 06:17 AM

[SW Richmond:]

There is nothing free market about this economy. Fundamentals:

Rising commodity prices indicate lessening of faith in paper assets. Paper assets are what the 40-something investor class has built its existence on. This same investor class has experienced nothing but rising stock markets for their entire adult lives and thinks they have a right to constantly rising stocks. Making money is easy when stocks only go one way, isn't it?

seekingalpha.com/artic...

So it is no surprise that the investor class will develop a theory about commodity prices, and send a representative to present that theory to cause them to be regulated. The goal here is to cause money to continue to flow into paper assets. Paper assets that are depreciating in real terms at a shocking pace.

One only need look at Master Capital Management's portfolio:

www.tickerspy.com/memb...

which includes such oil-gobbling winners as AMR, DAL, USAirways, and UAL to understand his motives.

A money bubble is being blown in an effort to reinflate. The trouble with blowing money bubbles is that you have little real control over where the money goes once you have printed it. Capital controls are needed to force the money to go....into paper assets.

The last commodity "bubble" was a reaction to loss of faith in paper assets after convertibility was abandoned. Nixon closed the gold window, and the arabs decided they didn't want worthless paper anymore.

Now we learn that the GCC "has the blessing of the US" in its pursuit of a non-dollar trading standard. Since this is the standard that in effect backed the dollar with oil, the future of oil, and the dollar, is assured. Will there be corrections? Certainly. Will the US authorities respond with every regulatory trick available to try to keep oil low? Absolutely. But we all know where it leads, where it MUST lead, don't we?

2008 May 27 07:44 AM

[rodtm:]

It pretty much is the whole story on commodity prices - the gold standard ended in 1971!

2008 May 30 12:06 PM