A brief history lesson

Macro Man has been thinking a bit more about commodities recently, and before addressing the upcoming Fed meeting in another post later this week, he thought it would be useful to follow the line of thought.

Commodities generally, and gold in particular, have been in the headlines recently given their sharp price decline.  Some, indeed many, commenters have expressed the idea that gold is oversold, below its equilibrium level, due for a bounce, etc.    While short-term momentum indicators have certainly reached oversold levels (and are exhibiting a bit of positive divergence), Macro Man thought it would be useful to put the recent price decline in a longer-term perspective.

Obviously, the supply/demand/storage dynamics for commodities can differ dramatically, and just because one has gone down a lot does not necessarily imply that others should follow suit.  Nevertheless, if we look at a broad range of commodities we can still perhaps get a sense of whether or not there are outliers- particularly in the case of gold, where the vast majority of the stuff that is dug up is not "consumed."

With the aid of his friend "Raving Irons", your author perused a number of medium-term commodity charts to get a sense of where the current decline is in historical perspective.

Here's the chart of copper, for example; as you can see, the current decline has taken it to where it bottomed in 2006/07.  (Incidentally, a break of this level would look pretty ugly from a technical perspective, with plenty of fresh air between here and a 50% decline.)

 Other industrial metals look no better.  Here's aluminum, which is back to where it was in 2004/05.

Nickel doesn't look any better, with a its price decline representing a similar journey back in time.

OK, we can chalk all of these up to "China" and the "economic cycle", and say that they represent a specific dynamic given that China's been the hegemonic source of demand for a dozen years.   How about energy?

Brent, which strips out the pipeline/refining issues that can distort WTI pricing, is also back to 2006/07 levels.

Natural gas, the production of which has benefited from all of the alternative energy exploitation in the US, is back to where it was in 2002.

Even wheat, which doesn't require a supercycle of investment to shift production patterns, is where it was in 2006/07.

As for gold's monetary chum, silver, its recent shellacking has put it back to 2007/08 levels.

And gold? Alone of all the commodities surveyed, it is above its high price before Lehman Brothers went under.

Perhaps the question, therefore, is not why has gold done so badly, but rather why has it done so well?