Rucher Sharma: If It’s in the Ground, It Can Only Go Down

As playwright Arthur Miller once observed,"An era can be said to end when its basic illusions are exhausted." And most of the illusions that defined the late global economic boom—the notion that global growth had moved to a permanently higher plane and housing prices from Miami to Mumbai would rise indefinitely—are now indeed exhausted. Yet one idea still has the power to capture imaginations and markets: it is that commodities like oil, copper, grains and gold are all destined to rise over time. Lots of smart people believe that last year's swoon in commodities prices represented a short pause in a long-term bull market.

It's a view rooted in powerful and real trends, like the growth of China and India, the decline in global reserves (many of the world's biggest and best oilfields are tapped out), fears over resource nationalization (independent oil firms now control only 20 percent of global reserves) and long-term underinvestment in energy and agriculture, which hampers supply.

Yet the fact is that the world has faced all these issues before, and for the past 200 years, commodity prices have been trending downwards, thanks to new technologies, greater efficiency in extraction and the substitution of one commodity for another (which explains the high correlation between commodities prices). Bank Credit Analyst, a research firm based in Montreal, has data showing major industrial commodity prices are 75 percent below where they were in the year 1800, after adjusting for inflation. Despite all the worries over"peak oil," the fact is that the major bear markets in oil have been demand, rather than supply led. And when demand eventually picks up, there's usually some new alternative (nuclear energy, natural gas, green technologies) waiting to pick up some of the slack. The real price of oil today is now at the same level as in 1976 and, before that, in the 1870s, when oil was first put to mass use in the United States. This long-term price decline is due mainly to the constant discovery of new fields and greater energy efficiency, making nonsense of the idea that the world is rapidly running out of oil. The experience of the 1980s is instructive in the current context as well....