US$ Production vs Commodity Production

Mark J Lundeen
mlundeen2@Comcast.Net

Gary Gensler
Chairman CFTC
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
202-418-5000, V
202-418-5521, F
questions@cftc.gov

I'm an investor in mining and mineral exploration companies. Recently in the financial media, the theme of rising commodity prices from "excessive speculation" has been discussed. From listening to these discussions, it's apparent that within certain circles, rising commodity prices are prima facie evidence of "excess speculation." I disagree. There are other causes for rising commodity prices. The most likely cause of future increases in the price of commodities is also the one reason never discussed by politicians, regulators or journalists: monetary inflation.

I've prepared three charts for your consideration. Please note, with the exception of US Currency in Circulation, (US Dollars) the plots are * not * in dollars, but in units of production.

Financial history tells us that from 1960 to 1980, we had an inflationary economy. After 1980, the story goes, Fed Chairman Paul Volcker, "broke the back" of the inflation. As "inflation" is currently defined as price increases, published in CPI and PPI by the Department of Labor, this is a fact documented in the CPI record.

However seldom noted, this leveling of CPI inflation in the early 1980s was coincidental with the largest explosion of dollars in circulation in US monetary history. It's very odd seeing demand (dollars) rise significantly above supply, (basic commodities available) with little impact upon prices as measured in CPI. I've given these charts much consideration, and the solution to this enigma is, after 1980, excess dollar production from the Federal Reserve flowed into financial assets.

This situation, graphically displayed in these above charts, presents a deflationary/inflationary problem for the future.

I'm sure you're aware of the push, beginning in the Carter Administration, to get the Baby Boomers to "invest for your retirement" via tax-deferred investment accounts. With the cooperation between Washington, Wall Street and the media, from 1980 to 2007, the "invest for your retirement" campaign was a total success resulting in excess dollars issued by the Federal Reserve, to ultimately flow into Wall Street for tax-deferred investments. But while this scheme deferred the Baby Boomers taxes, it also deferred their consumption of material goods. The day is close at hand when people of my generation are going to sell their financial assets for the purposes of consumption. The impact upon the prices of financial assets and consumer goods will be significant.

I suspect economists employed by the Federal Government have been concerned about this situation for years, and have already taken preliminary steps in preventing the river of inflation from jumping its levees and flowing into the Consumer Price Index. My next two charts are for the Comex Gold and Silver commercial traders. They strongly suggest that downward pressure has been placed upon these markets for years. The price of gold and silver are important. I think it is safe to say that for Washington, lower gold and silver prices are preferred to higher prices.

Using your data on commercial traders, I note in each report the commercial long short contracts. In reports where net longs exceed net shorts, I generate a +1 for that week. In reports where net shorts exceed net longs, I generate a -1 for that week. Each data point for the Step Sum is the sum of the +&-1 from 1986 to that week. Think of the Step Sum as an Advance - Decline Line, allowing us to see trends of net-long or net-short positions for the commercial category.

Since 2001, the gold commercials have been net short on the Comex. It's unlikely that these short positions are from mining concerns, unless management's motivation was for a purpose other than for creating profits for their shareholders. It's unlikely that the jewelry industry would be going short in a rising market. So that leaves hedge funds and banks, who neither produce nor consume gold, selling massive amounts of gold at the Comex. One would think their losses would be considerable, unless their losses in the precious metals markets were offset by profits in the much larger financial asset and derivative markets. Gold prices above $1,000, and rising, would create downward pressure on the bond market, which is huge when compared to the metals markets.

The silver commercials below have never reported a net long position since 1986! One has to wonder how high the prices of gold and silver would be today if the CFTC had not allowed this uneconomic shorting activity to flourish. I think prices higher than Washington would like.

The CFTC's current crackdown in the oil market may be justified. I have no specific information indicating it's not. But my concern regarding this action against the oil speculators, is that it will set a public precedent for future instances of rising prices resulting from adverse natural supply and demand fundamentals made manifest by past, present and future over-production of US Dollars by the US Federal Government.

There is tremendous pent up demand for commodities, because there are so many dollars currently stored in dollar-denominated, financial assets held by global central banks, insurance companies and other international financial houses. At present prices, I fear there are more dollars in existence than things for these dollars to purchase. Prices must be allowed to rise to their own natural levels, or the US dollar is in danger of becoming a currency that can't purchase anything. What happens then?