Gold market shifts focus to inflation

High demand for essential commodities, such as grains and oil, is forcing up world inflation. Both are in shortage. If the food shortages are already causing panic buying of rice, so then, oil is ready to see possible huge price spikes since the world has not seen rising oil production since roughly 2005, but oil consumption continues to rise dramatically. There used to be some extra world oil production capacity, but now there is little to none.

In addition, there is a big power shortage in much of the world. That affects mines, as do record diesel prices. But, with shortages of oil and grains, the inflation genie really popped out of the bottle. The poorer nations and the big developing ones are scared of what rising rice and wheat prices will do to their stability. Fertilizer prices have doubled and more in the last year. Rice, doubled and more, wheat doubled and tripled then fell back, but is still quite high. Wheat, rice, oil are all in shortage. Grain and oil prices are inputs to just about all other prices.

Since energy and food are in shortage, unless there is some supply relief, food and energy inflation will remain with us. This is not a short term story. Grain consumption has increased faster than supply, and most nations have sold off their surplus in recent years. That means that there is very little cushion for grain prices in the coming year. Oil is in the same predicament, as world oil production has already peaked, arguably, in 2005. Since then, world oil production has largely leveled off. There is no surplus oil capacity.

As story after story filled the news about grain shortages this year, and oil production peaked and there is little excess capacity, the gold market just shifted its focus in May to the inflation story. Just prior, the gold market was focusing on the (supposed) improvement in the credit crisis. The credit crisis had boosted gold from the $600s to over $1000 but it fell back a bit on the supposed improvement in the credit crisis. But, now it looks as if gold is getting ready to retest $1000, as its new focus is on the big world inflation story, particularly in food and energy. And as I said, this inflation story is not going away anytime soon.