Posted by: commoditywise | July 22, 2007

Are we fuelling the commodities bubble?

I

n Life, we all love to have quick answers even for easier questions.  

But here’s a bit difficult question: Who is important – consumers or investors? 

As a consumer I want commodity prices to be lower so that along with majority of you, even I can balance my weekly / monthly budget and can look for buying new and better life-style products. But as investors either of physical commodities or commodity stocks we always want prices to be higher.  

Consumers, say in India are 1.3 billion. On the other hand, investors in India are just around 15-20 million – pardon me for such a wide range, because authentic figures are a wild guess, even for the government’s own Press Information Bureau (PIB). And despite over two decades of equity cult in India and massive infusion of foreign funds that has buoyed Indian stock prices to dizzying heights, the finance minister P Chidambaram now feels massive investor program on investor education is a must.

So, who is important – Consumers or Investors? 

Since mid-2006, higher commodity prices have been fuelling the inflation dragon, which in turn is giving sleepless nights to policy makers and their central bankers the world over. Through some financial gimmickry like raising interest rates the policy makers and their friendly central bankers have `managed’ to bottle the inflation genie and a section of finance ministers like our own seems to be convinced that high-price commodities-led inflation has been under control. US Federal Reserve Chairman Ben Bernanke however, is still worried about high inflation.

So, I find this issue of inflation under control a bit surprising. My wife also says so, grudgingly though.

Do you agree? 

Well, the Indian government seems to convinced that consumers have been used to higher commodity prices – forget high or low inflation, for, this is not for common man like you and me, but only for political propaganda.  So, now that there is no hue and cry about high commodity prices from consumers, the Indian government is keen to divert part of its energies and possibly even funds now for `massive investor education program’. 

No, I don’t dare to say here that the government is indirectly warning the investor to be watchful and be alert to the dizzying gyrations in the stock markets.    

But the question here is – Will this `massive investor education program’ also include increasing awareness and education of commodity markets too? There is a quantum jump in trading volumes on the three Indian online nationwide multi-commodity exchanges (NMCEs) since 2004 but the awareness of the complexities of this market is almost non-existent.  

Commodity markets are part of the larger financial markets. While the integration of the two has been in the making since the past more than a decade, the resurgence in the interest of cross spectrum of investors in commodity markets has been since 2002-2003 – relatively a recent phenomena. However, it is no secret that the financial markets as a whole have been fuelled by the availability of cheap money, and that too easily. Add to this the advanced technologies that facilitate investors to trade online from any corner of the world, including from your bedroom and kitchen too – you see, increasing number of housewives too are now lured to trade in stocks.

All this is fuelling the financial bubbles that Allan Greenspan, the former chairman of USA Federal Reserve had hinted in December 1996 by saying “irrational exuberance”. Therefore, it’s been almost a decade that there has been building and bursting of different asset class bubbles, more so the equity market bubble and now the real estate bubble in the USA.

As regards commodity markest, we as investors have almost been mesmerized and lured silently to believe by the likes of commodities guru Jim Rogers and hundreds of others following him, and the brokers of the top-ended commodity brokerage houses that we are in a 15-20 years commodity bull run. And possibly rightly so, more because rising income levels in developing countries like India, China, Russia, European countries, the countries in Middle Eastern regions and elsewhere would result in rising demand for goods and products which are made from commodities.  Therefore, the commodity prices are likely to remain higher for some more years. There is hardly anything we can do about this as this is a global phenomenon that was hinted even by our own finance minister P Chidambaram earlier this year while presenting the 2007-08 budget proposals on February 18, 2007. 

So, like it or not, higher commodity prices would silently continue to fuel inflation dragon,  bottled or otherwise. By now, we as consumers have been used to high prices and like mine, even your wife would be nagging you to allocate more `funds’ to the grocery kitty. But as investors of physical commodities or commodity stocks, you may like it and benefit from P Chidambaram’s latest efforts in raising investor education.  

So, the otherwise thick line dividing consumers and investors seem to be thinning here and the inflation dragon is smiling…May be, we as consumers and investors are unconsciously also fuelling the commodities bubble… 

You see, there are no easy answers in life for difficult questions. If you find answer to the difficult question above, please inform me, I would appreciate your views with your answer.

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Responses

  1. The Indian market is so attractive to the global investors because of the rising purchasing power, partly fueled by the personal loans and credit cards that allows the comman man to spend more than he earns.

    The huge middle class population in India is attracted by the cheap products which are no where sold in the world (see the cheap mobile phones sold in India by the Multinationals..).

    This is not a good for the future of India!

    Regards,
    Ramesh Natarajan, Dubai
    Global Indian

  2. Dear Ramesh

    How apt are your observations on India!
    But the future of India is bright, as every economy and its citizenery go through the learning curve. As the economy matures, its citizens demand products better than before, and the manufacturers and traders are ready to supply them at the right prices or they lose out to competition.

    Cheers!

  3. […] Are we fuelling the commodities bubble? […]


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