And that's not all



Other precious metals continued to trade strongly after Thursday's rally with silver at $12.16 a troy ounce. Platinum traded at $1,080 a troy ounce while palladium traded at $353 a troy ounce.



So, here's little bit about copper, from the Financial Times of London:



Copper nears $6,000 a tonne on low stocks Copper prices have hit record highs almost daily over the past two weeks, getting close to an unprecedented $6,000 a tonne, double the average price of two years ago, and creating a situation some followers of the red metal label a "super spike". CRU, the London-based metals consultancy, says that with global inventories at very low levels of about two weeks of demand, the market will be unable to weather any further supply disruptions - there have been production problems in Indonesia and Mexico in the past month - without continued price rises. (...) The "super spike" scenario was put forward last year by Goldman Sachs, referring to the oil market in a situation in which stocks are low and supply cannot be increased, leading prices to jump to a level that deters consumption. "This is where we are today in copper," Mr Kettle said.



So, prices strongly up. Liquid, global markets. This should be a signal for demand to go down and supply up, right?

Well...



Copper producers fear affect of high prices on future demand With copper approaching $6,000 a tonne, you would think that producers of the metal would be in buoyant mood. In fact, they are starting to worry that prices at this level may ultimately damage future demand. Miners also believe that current prices reflect the challenges of increasing output of the red metal, given a background of lower copper ore grades, higher energy prices, and environmental issues. (...) "We had a situation last year where demand did not grow, even though the global economy was growing very strongly, by more than 4 per cent. But prices kept on going higher," Mr Venegas said. Copper is used in the construction, power, electronics and automobile sectors. One reason for the flat demand growth for mined copper was that industrial users of the metal were using their stockpiles as they baulked at the prospect of paying record prices for the metal. This resulted in falling global stockpiles - including producer, consumer and futures exchanges inventories - which are now at the equivalent of about two weeks of global demand, according to CRU, the metals consultancy and forecaster. Industrial consumers, who have run down their own inventories, are now facing the prospect of paying even higher prices than the levels they were reluctant to pay last year. (...) CRU predicts global copper demand will rise by 4.3 per cent to 17.53m tonnes this year, which it expects to be met by a greater rate of supply growth. The London-based group estimates that copper supply will rise by 7.1 per cent to 17.84m tonnes in 2006. However, mining executives appear to be pessimistic about whether this supply growth can be achieved. (...) "A one million tonne increase is a lot to expect and it has not been done many times before, and I think the funds are betting that supply will disappoint this year, which will in turn push prices higher," Mr Venegas said. Funds have good reason to take this view. Last year copper production fell 500,000 tonnes short of the forecasts made by the International Copper Study Group at the beginning of 2005. In addition, the recent supply disruptions at Grasberg, the world's second-largest copper mine in Indonesia and strike action at Grupo Mexico's La Caridad copper mine have led to lower supply estimates for the second quarter. This has resulted in a supply shortfall in one of the strongest demand periods of the year for the industrial metal, leading in turn to copper inventories falling further from already critically low levels and making prices more vulnerable to further price spikes.



Let's summarise:

strong underlying demand growth from a buoyant world economy (expressed, in this case, in decreasing stocks rather than increased apparent demand);

producers unwilling or unable to produce more, and faced with increasing production costs;

short term disruptions like weather events or strikes that cause major price volatility;

financial investors reinforcing the trends in the expectation of more to come.



Sounds familiar? It is. The above 4 points are absolutely true for oil, and it seems that the same dynamics are at play.

The interesting thing to note, once again, is the difficulty for supply to go up. There are objective factors (energy prices, the slow internalisation of environmental costs, and the depletino of the best reserves), and there are the "political" factors (a reluctance to increase production, as it could bring prices down and make the additional investments unprofitable).

What we see confirmed, once again, is the deadly combination of increasing demand and the inexorable increase in the marginal cost of the resources, leading to massive price increases. The era of cheap commodities seems to be truly over.

Interestingly, the IMF blames that situation for the consumption binge in the US:



IMF in warning on high energy prices High energy prices are "exacerbating" global economic imbalances, increasing the risks of a crisis, the International Monetary Fund will warn next week. The IMF will say in its World Economic Outlook report that "global current account imbalances are likely to remain at elevated levels for longer than would otherwise have been the case, heightening the risk of sudden disorderly adjustment". (...) High oil prices are increasing the US trade deficit, the report says. In addition, the recycling of petrodollars is driving down interest rates providing an unsustainable boost to US private consumption. (...) Washington has blamed surpluses in Japan as well as in emerging Asian countries, particularly China, for its current account problems. But the IMF's concentration on oil prices and global imbalances shows that the issue has grown in complexity over the past two years.



This is an issue I've written a lot about, and where Stirling Newberry has written some fairly extensive diaries as well, but it's new to see that link between oil prices, debt and global unbalances from an institution such as the IMF.

In effect, higher oil prices have a double negative effect:

the increased cost of oil creates a significant trade balance for the USA;

but at the same time, the dollars captured by the oil producers are re-invested in US Treasuries, thus lowering the interest rates and making it easier for Americans (and international investors) to borrow - thus leading to increased spending and increasing imports (thus worsening again the deficit), and inflated asset prices, and creating, strangely enough, a appearance of increased wealth;



Oil costs more, but as the dollars it costs are recycled in the US financial system, they end up being spent a second time (via debt), this time on Chinese stuff. As the Chinese also recycle their dollars in the US, to protect the exchange rate of the yuan against the dollar, the cycle can start anew...

And thus oil prices increase, consumption still grows, and the US debt balloons.

If this sounds like a pyramid scheme, well, it looks suspiciously like one. And as we've already seen, it can last for a long time, as it is in the interests of no one in the cycle to rock the boat.

So, what will break its back?

Hmm, maybe a little war in Iran?