|
To paraphrase
Einstein, not everything worth measuring is measurable and not everything
measurable is worth measuring. The purchasing power of money falls into the
former category. It is worth measuring, in that it would be useful to have a
single number that consistently reflected the economy-wide purchasing power
of money. However, such a number doesn't exist.
Such a number
doesn't exist because a sensible result cannot be arrived at by summing or
averaging the prices of disparate items. For example, it makes no sense to
average the prices of a car, a haircut, an apple, a dental checkup, a gallon
of gasoline and an airline ticket. And yet, that is effectively what the
government does -- in a complicated way designed to make the end result lower
than it would otherwise be -- when it determines the CPI.
The
government concocts economic statistics for propaganda purposes, but our
point here is that even the most honest and rigorous attempt to use price
data to determine a single number that consistently paints an accurate
picture of money purchasing power will fail. It will necessarily fail because
it is an attempt to do the impossible.
The goal of
determining real (inflation-adjusted) performance is not completely hopeless,
though, because we know what causes long-term changes in money purchasing
power and we can roughly estimate the long-term effects of these causes. In
particular, we know that the purchasing power of money falls due to increased
money supply and rises due to increased population and productivity. By using
the known rates of increase in the money supply and the population and a
'guesstimate' of the rate of increase in labour
productivity we can arrive at a theoretical rate of change for the purchasing
power of money. This theoretical rate of purchasing-power change will tend to
be inaccurate over periods of a year or less but should approximate the
actual rate of purchasing-power change over periods of five years or more.
We've been
using the theoretical rate of purchasing power change, calculated as outlined
above, to construct long-term inflation-adjusted (IA) charts for almost two
years now. Here are the updated versions of some of these charts, based on
data as at the end of May.
1. In current
dollar terms, the oil price peaked at just under $200/barrel in 2008 and at
around $170/barrel in 1980. It is now only slightly above its 40-year
average.
We doubt that
oil will ever again trade below $50/barrel in nominal dollar terms. Also, the
2008 peak was almost certainly the secular variety, so we probably won't see
the IA oil price trade above its 2008 peak any time this decade. If oil does
make a new high in IA terms within the next few years it will be because of a
major Middle East conflagration that greatly reduces the global supply of
oil, not because of rising demand or geological limitations on supply.
2. As is the
case with oil, in IA terms the copper price probably made a secular peak in
2008. As is also the case with oil, the IA copper price is now only slightly
above its 40-year average.
Falling
demand due to a global recession over the next 12 months could cause the
copper price to drop back to $2.00, but we doubt that it would stay that low
for long because economic weakness always prompts central banks to boost the
money supply. However, future rounds of QE (or whatever other name they give
to the money pumping) probably won't do anywhere near as much for the IA
copper price as the earlier rounds did. Another way of saying this is that
copper probably won't be one of the main beneficiaries of future monetary
inflation. One reason is that China's construction boom is turning to bust.
Another is that the high prices of the past six years have increased the
current and future supplies of this metal.
In 2012
dollar terms we think a copper price in the $2.50-$3.50 range is about right.
We would therefore steer clear of copper mining projects that required a
copper price of much above $3.00/pound to be economically robust and we would
be wary of low-grade copper projects with unknown economics.
3. In early
2008, the combination of fear that electrical power shortages in South Africa
would severely disrupt the global platinum supply and fear of Fed-sponsored
dollar depreciation drove the IA platinum price above $3000/oz (about $2300/oz at the time,
which is the equivalent of just over $3000/oz in
terms of today's dollar). This will probably turn out to be a secular peak
for the IA platinum price, although platinum stands a better chance than
either oil or copper of exceeding its 2008 peak in IA dollars. There are two
reasons for this. First, platinum supply is more concentrated and therefore
more vulnerable to disruption than oil or copper supply. Second, we expect
that platinum will benefit from the continuing upward trend in the IA gold
price.
We may be
interested in buying platinum if it drops to $1200/oz.
4. The IA
gold price continued its long-term upward trend following a normal
intermediate-term correction during the 2008 crisis. It is yet to experience
a major upside blow-off like it did in the lead-up to its January-1980 peak
and like the oil, copper and platinum markets did leading up to their 2008
peaks.
5. In nominal
dollar terms, silver's April-2011 peak was a test of its January-1980 peak.
In IA terms, however, silver's highest price in April of 2011 was only
slightly more than one-third of its 1980 peak.
Silver's
January-1980 peak was so extraordinary that it will possibly never be
exceeded or even seriously challenged in IA terms, but there's a high probability
that silver will handily exceed last year's peak in IA terms before its
long-term bull market comes to an end. This is largely because although
industrial demand plays a much bigger role in the silver market than in the
gold market, investment demand is still the primary driver of silver's
long-term bull market. Furthermore, the same factors that should continue to
boost the investment demand for gold (government and central bank stupidity
in all its forms) are likely to do the same for silver.
6. Because
the official "inflation" indices chronically understate the
reduction in currency purchasing power, using these indices to calculate
inflation-adjusted performance overstates the performance. That's why
Malthusians such as Jeremy Grantham are able to use CPI-adjusted charts of
the CRB Index to support their theories that the world is about to run short
of valuable agricultural and industrial commodities. These CPI-adjusted
charts suggest that the ultra-long-term downward trend in "real"
commodity prices has ended, an implication being that commodity supply is now
in a long-term downward trend relative to real commodity demand.
The picture
is very different if our preferred method is used to adjust for the effects
of inflation. As illustrated by the following chart, the IA CRB Index made a
new all-time low in 2001 and then peaked in 2008 at well below its 1974 and
1980 highs. There is no evidence that its long-term downward trend has ended.
Steve Saville
www.speculative-investor.com
|
