The collapse of one bubble often sows the seeds of the next

The Economist explains why the "commodities bubble" didn't pop in 2006 and why it is not likely to do so in 2008 either - unless global demand falls dramatically (which has yet to happen) prices paid are all about supply.

Oh yeah, investment money looking for a new place to land doesn't hurt either.

BANKERS and policymakers may be wringing their hands about the prospects for the world economy, but commodities traders, it seems, see no cause for concern. On Wednesday February 20th the oil price hit a new record of $101.32 a barrel. Soyabeans and platinum, among others, have also reached record prices in the past week. Vale, a Brazilian mining firm, has persuaded some steelmakers to pay as much as 71% more this year for its iron ore. Across the world the inflationary impact is tangible. In America consumer prices in January were up 4.3% on a year-over-year basis. Excluding food and energy, they were up 2.5%, well above the Federal Reserve’s comfort level.

Despite a few years of rising raw-materials prices, many traders remain bullish in part because of further bad news about supply. A shortage of electricity in South Africa, which has forced several big smelters to shut down, has helped cause platinum’s giddy ascent. The political upheaval in Kenya has pushed tea prices higher. A leaking pipeline in Nigeria and a row between Exxon Mobil and Hugo Chávez, the president of Venezuela, have contributed to oil’s recent gains.

Mining and oil firms are struggling to increase output, partly because it takes years to develop new mines or oilfields, partly because shortages of equipment and labour are hampering expansion, and partly because governments in resource-rich countries are becoming ever more prone to jacking up royalties or expropriating resources.
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As falling interest rates, tumbling stockmarkets and contracting house prices drive investors out of bonds, equities and property, the argument runs, there is lots of money looking for a new home. And since commodities have produced such lavish returns in recent years, and have weathered the recent turmoil relatively unscathed, they are an alluring option.

Citigroup believes that the recent rise in the oil price “is driven principally by a sharp uptick in fund flows.” Lombard Street Research sees an “iron bubble”. Others worry that America’s fiscal stimulus may cause trouble by inflating demand for commodities. In Citigroup’s cheery phrase, “the collapse of one bubble often sows the seeds of the next.”

Soyabeans?

It looks like Jim Rogers is going to be right after all - we're probably only about half-way through the current cycle.

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