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Commodities: Remission not cure

Commodity prices will need to go higher again to prompt consumer and producer actions that bring them down.

Commodity prices have come down dramatically from their peak earlier this year. Oil, which threatened $150 a barrel, had plummeted well below $100 at the time of writing. Gold showed few signs of coming close to retouching its $1,000 an ounce highs of the spring.

Although other factors such as speculation-driven overshooting are doubtless also at play and some commodities have been affected by the exogenous forces of Mother Nature and politics, the adage that higher prices are the cure for higher prices looks as true as ever. Consumers and producers of oil have responded in textbook fashion: reducing their consumption and increasing their production. As a result, prices have fallen… for now.

Looking a few years down the line, however, it is clear that demand for commodities will continue to grow and that producers will need a sustained period of high prices to invest in new capacity and increase production.

That level, however, has not yet been reached for many commodities. In the case of gold, increasing scarcity and rising costs of production mean that prices might need to rise at least 20% just to make new investments viable.

Margins for producers are not looking good.

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