Investing in Commodities

The abundance of commodities like crude oil, coal, copper, iron-ore, aluminum, potash, phosphate, wheat, soybeans, maize, is the real cause of prosperity of humans. Economic progress for humans is defined by super abundance of these basic goods from which all other goods are derived by the application of human labor. You can think of a car as a finished good which is a product of the various metals, coal (electricity) and the human labor component. The finished goods/basic goods concept was popularized by Hayek, but the real idea was from the Master, Adam Smith. Hayek just reinterpreted it and the world started believing that it was his idea-it wasn't. You can find it in "The wealth of Nations" or online at adamsmith.org here. It is hard to find original ideas in Economics which can't be traced back to Adam Smith. In many cases his ideas have been distorted and misrepresented by Economists with PhD degrees and Nobel prizes. Even David Ricardo's theory of rent and comparative advantage originates with Adam Smith, notwithstanding his manner of writing "Principles of Political Economy.." as a challenge to Smith's ideas.

A world where farmers don't produce surplus food for sending to the city can't survive for long. The cities will die of starvation. Clearly food is a basic necessity-division of labor, etc. in a city can proceed only when the city population is well fed.

Let's imagine a world where all miners stop producing the metals and coal and oil they extract (I put oil and coal in mining-they are closely related). Such a society can't survive for long-the city folk need all these basic necessities, or commodities, to carry on their division of labor and improvements in their jobs. If you think of it in reverse-it is the abundance of these commodities from the mines which results in real progress in the city.

The abundance of food, and by extension, basic commodities and raw materials, is the real cause of value for all other products. This idea is again from Adam Smith, and can be found here.

This is the reason that my investments in the stock market are heavily in mining (including energy) stocks. Their real production needs to go up in time for the world to progress-and it is amusing that the most stable sector of the economy, the mining industry, is the most volatile. The volatility in the mining sector is caused by the momentum players-banks and hedge funds are the major ones-who are attracted to the rising prices in a bull market for commodities and try to make a quick buck in a month. When prices fall, they get out in a hurry and their "stop loss" gets executed to minimize their losses, or because of their overleverage they are taken out by their broker's margin call. Since this is hot money wanted to make a quick buck-it tends to exacerbate market swings and increase volatility. Economics and Finance people who believe that putting more participants in a market decreases it's volatility (Greenspan is one of these people) are wrong because that happens only when they play the market maker-buy low, sell high. However, if everyone comes with a momentum trading idea in their head, buy high-sell higher-then it increases volatililty and the real market makers show losses. But those losses are temporary-eventually the mining sector comes back and sets new highs, and makes money for all in it.

Sanjay