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The following chart plots the price of gold, wheat and a broad commodities index against the general price level in the U.S. since January 1975. The plot is showing percentage deviations from the 1975-2008 average – I would have used a longer time series if I had time and money.


I guess several things are worth pointing out (note that real macroeconomists will no doubt have something more useful to add, and I encourage any and all insights to be shared here!):

  1. The general price level, as measured by the CPI-U, steadily increases. Aside from its smoothness I am struck by the fact that it virtually never takes a dip;
  2. A broad basket of commodities as measured by the index (blue line), while much more volatile than the overall price level, seems to be priced similarly to the overall price level (in terms of how far above its long-term average it now stands). In other words, by this metric, it does not appear that commodities broadly speaking are overpriced right now;
  3. Viz. #2 above, I suspect that part of the recent run up has something to do with the long and sustained drag on commodities prices from the early 80’s to the early millenium. If you were to look at a plot of actual prices, you will see that gold foundered around the $250-$300 mark for quite some time, for example. Why, despite steady increases in the overall price level, did commodities behave this way? As a simpleton economist, I always look to supply and demand responses first, and I suspect that better technology enabled commodities producers to markedly improve productivity and output, despite steady increases in demand and inflationary pressures. I have nothing to substantiate that claim, so I welcome anyone who can say something more definitive about it.
  4. Wheat prices do seem to be abnormally high. And that is not just because of market-induced supply and demand affects.
  5. Gold struck the $1,000 mark yesterday. I don’t know what that means. Can institutional investors buy gold and other commodities directly?

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