Commodities as cash

Commodity prices can rise because of recognized global demand, because of a new category of demand (for reserve management purposes), or because the U.S. dollar is falling and producers need to maintain a steady revenue stream in euros. You don’t have to imagine that oil will be officially re denominated to euros for the level of the euro/dollar to have a decisive effect.

Commodities lack all of the properties of money except one — store of value. Commodities have inherent usefulness, although you can’t use them as a medium of exchange or unit of account. We might say commodities are the new gold. Aha! Using that phrase discloses that the new commodity boom is based on a chain of reasoning that arises from what used to be the gold-bug universe. Instead of just railing against fiat currency at the whim of fickle and venal governments, the argument has become vastly more sophisticated. Not just gold, but all commodities should rise as the dollar falls.

Well, the gold bug crowd has been forecasting the demise of the dollar for decades, and while the dollar has devalued considerably, we have still never reached the “tipping point” when international investors throw in the towel. Remember, in January they put more than $94 billion in one month alone into U.S. securities. Does that sound like they are about to jump ship?

Nevertheless, it’s a coherent and cogent argument. The commodity boom can continue without an outright onetime dollar crisis (although the dollar could continue to lose influence and importance). If evolution (rather than revolution) is the mode of change, the commodity-producing country currencies (such as the Canadian and Australian dollars) can only prosper. You don’t have to be a gold bug to re-direct your attention (and asset base) to commodities and commodity-related currencies.