The Rules of the Game

U.S. Federal Reserve Chairman Ben Bernanke recently announced that he does not consider inflation to be a problem. However, U.S. corporate reports suggest otherwise, and in almost every report evidence of inflationary pressure can be found.

For example, the volume of sales at Procter & Gamble grew two percent, yet earnings fell more than 25 percent. The company ascribes the result to increased expenditures for raw materials. The company estimates that these will more than double over the next year, reaching one billion U.S. dollars.

Likewise, the tire manufacturer Goodyear increased its quarterly sales by 14 percent but finished with a yearly loss of $177 million. The main reason was said to be a 20 to 30 percent increase in the cost of raw materials. The price of rubber, the company’s primary input, has risen 40 percent since October 2010.

Similar inflationary motifs are evident in each report. Company managers note that this price hit will be passed along to consumers. And taking into account corporations’ international business, the jump in inflation will be felt worldwide.

Economies are cyclical, and in all likelihood the 30-year cycle of lower inflation has ended, and a period of rising prices of the same duration is about to begin.

It is not surprising that in this “pre-inflationary” situation, when governments have printed a great deal of unsecured money, investors are searching for protection for their capital.

The traditional method is to invest in commodities markets. But are those not the very commodities markets that are overvalued and oversubscribed? Will “devaluation” suddenly become a problem?

The more speculators there are in the market, the greater the likelihood of a decline. After all, sooner or later speculators leave the market, selling assets, which leads to a steep drop. One popular way of estimating the speculative presence in a given market is to compare “commercial” and “non-commercial” trading accounts on the exchange.

Commodity exchanges publish such accounts regularly. However, currently this method does not work well since “production workers” can engage in exchange speculation, knowing the market situation better than others.

Another method of estimating speculative components consists of calculating the ratio of marginal demand to the volatility of the market. The lower the monetary deposit while price fluctuations increase, the more attractive the market will be for speculators.

After all, they are not tied to one commodity or another. It is all the same to them which market is “heating up.” If you calculate the “speculativeness” of the commodities market using this method, copper is the most interesting metal for speculators today, while cotton, corn and wheat are the most interesting in the category of foodstuffs.

Some may consider this a coincidence, but these very commodity assets showed the greatest increase over the last several months.

For me it was completely unexpected that the most “unspeculated” commodity from this standpoint was gold. It turns out that all the conversations about speculative overbuying of gold do not stand up to mathematical examination. Perhaps because they do no shine so brightly.