It's All Relative - The Interconnectedness Of Commodities

If you compare the price of oil to other commodities like gold, silver, copper, soybeans and other grains, I guess you could say that the price of oil looks downright bullish in comparison. Oil prices got caught up in the Fed frenzy mini taper tantrum as well as action by the Chinese government to try to cool commodity prices. The dollar went up and commodity prices got crushed. Grains in particular because of the possibility that drought-stricken parts of the farm belt will get some much-needed rain. Yet it is doubtful that these rains are going to be enough to break the drought conditions.

China's attempts to cool off commodity prices by releasing metals and grains from their reserves may actually make the situation worse. The reason commodity prices are going up so much is that demand is ahead of supply. The only way to solve that problem is to allow commodity prices to go up to a level that will either cool demand or stir investment to increase supply. The problem with China's intervention in the commodity markets is that it may not allow the type of investment that's going to be needed to meet this type of demand.

China's talk of instituting price caps on commodities and cracking down on commodity price speculators will actually have the opposite effect. One of the first rules of commodities is that if you put on a price cap, it will eventually lead to shortages. Maybe not today, maybe not tomorrow but eventually, it will lead to shortages. China has to be very careful with this commodity price intervention. The world right now is facing supply chain issues and commodity shortages and this type of intervention by the government could only make things worse. China needs to buck up and allow the market to work. China needs to allow high prices to cool demand but their actions are only going to heat demand. When China artificially lowers the prices of commodities, the demand side will only increase. That will further exacerbate shortages. Because the prices are artificially low it will not allow investment to the extent that is gonna be needed to meet future demand.

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