Commodity Paradigm Shift

“(Rick Bookstaber is a senior policy adviser at the SEC. This guest post represents personal opinion from his blog.)

Jeremy Grantham put out a great quarterly letter about the scarcity of commodities and the marked rise of commodity prices, calling this “the mother of all paradigm shifts”.

Two interesting points in his letter are:

1. China consumes between 25% and 50% of many important commodities.
2. Prices for nearly all commodities are two or more standard deviations above their long-term mean; four standard deviations for iron ore, coal, copper and silver.

The recent drop in commodity prices notwithstanding, this and other analysis lay down the groundwork for his concern about the end of falling commodity prices. No one can deny that, absent one hundred per cent recycling, non-renewable resources extracted from a finite world will finally run out. And, furthermore, that we are using these resources more now than we have in the past, and given the growth of China and other countries, there are major sources of consumption that were a rounding error even a few years ago.”

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