Friday, August 7, 2009

Commodity prices and government

Investment guru Jim Rogers said recently:
I'd rather own commodities than just about anything I can think of in a period when the whole world is debasing paper money. . . If I'm right, the [commodity] bull market still has a long way to go; the fundamentals have only gotten better in the last year. The best place to have your money is in commodities.
What has been the pattern of commodities historically? When the world used a commodity money -- gold or silver or both -- price indices show a decline in commodity prices. Hans-Hermann Hoppe, in Democracy: The God That Failed, notes that
Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800 [which was 102.2]. In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971, it was 255, by 1981 it had reached 658, and in 1991 in was near 1,000. . . [D]uring the seventy-three years from 1918 until 1991, the U.S. money supply increased more than sixty-four-fold.
The Fed began operations in 1914. Government abandoned gold in 1933 domestically and in 1971 internationally to remove an important barrier to inflation. Rogers is betting governments will continue destroying their currency. I see no reason to expect them to act differently.

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