William Trent_

Not Yet Enough Focus on Commodities For a True Bubble To Have Formed

Given that it will be years before those are productive, no. It is a matter of worldwide demand growing roughly 5% per year (maybe slowing to 3% if the economy slows down) while supply is flattish. The main adjustor to demand is price, which ultimately encourages people to by compact flourescent lights and hybrid vehicles but in the short run these have very minor impacts. As with most other commodities, it all comes down to supply.

Over the next several years the drills will be put in place to access all the new oil discoveries, and a nuclear plant or two will be built, and solar and wind will be installed and more competitively priced, and hybrids and flourescents will be somewhat more widespread, and (what will seem like very suddenly) the world will once again have more oil than it knows what to do with. If you can tell me what part of that equation is happening over the next 12 months I will become bearish on oil. If you can't...

Not Yet Enough Focus on Commodities For a True Bubble To Have Formed

WC,

The obvious reason, which I am sure you have considered in your own analysis, is that in 1981 inflation was very high and beginning a long-term downtrend (at the end of which it reached acceptable levels.) The current <i>level</i&g... of inflation is much lower today, so there is much less room for disinflation to benefit financial assets.

The next logical argument is that the <i>direction<... of inflation is uncertain today. However, it seems to me that either higher inflation or outright deflation would favor real assets over financial assets.

So to me the argument against commodities today is that inflation will stay in a sweet spot, declining somewhat from current levels but not entering deflation territory. Given my sense of the risks, I don't see that I am receiving an adequate risk premium for financial assets and thus prefer the real ones.

Given that you clearly feel otherwise, would you be up for making the case that distinguishes 2006 from 1974?

Not Yet Enough Focus on Commodities For a True Bubble To Have Formed

Asif,

A point well made, and one that I think applies particularly well toward certain commodities that have ready sources of new supply (agricultural commodities, for example.) Such commodities would tend to follow more of a cyclical pattern such as that you describe for homebuilders and steel, both of which are classic cyclicals.

The distinction between those and gold/oil would be that gold and oil are hard to find, increasingly hard to get at once found, and require significant time between the discovery of a shortage and the availability of new supply or substitutes. In this case, it can be seen more along the lines of Internet stocks, where the first few were in high demand, but then once the fever caught on so many new Internet companies were launched that the stocks weren't worth the paper they were printed on.

The same will happen (again) for oil and metals. It will just take longer than is implied by the recent correction.