Wednesday, November 2, 2011

How to Value Commodities?

You cannot analyze commodities apart from their relationship to other commodities.

It's a simple mathematical truism: say you have a closed system, for example, an island, with fixed amounts of critical resources such as food, energy, base metals, even labor. And each of those resources is used in some way to obtain, refine or simply process all other resources. In that case, you can never really talk about peak oil, peak zinc or peak anything as a separate, unitary factor; you're really talking about peak resources.

For when one resource that's critical becomes increasingly scarce, that resource by virtue of its relationship to all other resources will in turn make all those other resources scarce as well.

Again, the idea is that each resource is necessary, but not sufficient, to produce any other resource.

Obviously, this is an outline of a trivial mathematical proof concerning commodities.

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