Thomas Tooke

What commodities to buy during a war period?

In Commodities on August 4, 2012 at 5:26 pm

As previously mentioned Gold and commodities seem to be joined at the hip, yet with a great disparity of prices across the board. An interesting question which might be relevant today is to look at what commodities would benefit from a conflict? Is a ~war premium~ on oil warranted, is it a new phenomenon ? The historical series of the Greenback episode are instructive in that respect.

Mitchell wrote in 1908.

“The widest range of commodity prices was 1321 points (in July 1864, when cotton had a relative price of 1410, which meant that the war had the result of making the price increase many folds. “Evidently such an outcome was due to the disruption of production and shipments of cotton farms in the South. Would today a disruption of the Straight of Ormuz generate anything else than a large spike in price?

But one can be more creative, as we know China controls a large portion of the rare earth supplies of the world, should a conflict result in some tariff hikes, and constraints in supply, the hoarding and backwardation resulting from this set of global trade constraints would probably mimic what Thomas Tooke described as one of the key reasons for price hikes of commodities during the bank restriction episode.

As Thomas Tooke reflected in 1838 on the price hikes during the bank restriction in the UK:

“The remaining question is, what effects are to be ascribed to war as regards supply? And the answer may be, in general terms, that it is the tendency of war to diminish supply. The mode in which was may be calculated to operate to this effect, is 1st, by a diminution of production, and 2ndly, by increased cost of production, and by impediments to commercial communication. ”

Here one must reflect upon that reality. As we well know Silver is used for electronics heavily and for solar panels and other key technologies.  In case of a conflict, we might see the US dollar getting strong and Gold getting strong if the former is wrongly perceived as safe while the later somewhat less disputable from a typical historical response. In the end people are free to decide what they believe is the best store of value and they might decide that what the government decide is the mean of exchange is a very poor store of value.  But let us consider Silver now. If Gold were to spike with a conflict, Silver might spike for monetary reasons as well, but what would happen to the flow and constraints in trade of the metal which is a critical component for maybe many high-tech applications not only strategic but also part of the backbone of our modern economic system?

Thomas Tooke in 1838 writes:

“It will be readily admitted, that the immediate and obvious tendency of a state of war is to abstract a portion of the capital and labour, which would otherwise have been employed in reproduction; and if, from the course of military operations, or from arbitrary government exactions,  and apprehension should be superadded of insecurity of property, there will be a further cause for diminished production; so that dearth and impoverishment are likely to be the consequences of a state of war in a country thus situated. It is probable that circumstances of this kind operated in diminishing and deteriorating the cultivation among some of the states of the continent of Europe, in different periods of the war. In the early part of the war, the extensive military operations were calculated to diminish the produce of the Netherlands, Germany, and Italy; and, at the same time, the political convulsions attending the revolutionary period might affect the extent and quality of cultivation of the land in France.

In the subsequent periods of the war the course of military operations can hardly have failed to diminish the produce of Poland, Prussia, Saxony,and Russia, as likewise of Spain, Portugal, and Italy. And while causes like these were, perhaps,operating in a diminished reproduction in some of the countries alluded to, there were circumstances arising out of the war, which, beyond all question, added greatly to the cost of production in this country; these were—

1. The increased rate of interest of money, which, more especially as regarded all outlay as fixed capital, formed an important element in the calculation of the price at which reproduction could be continued, or a new production afforded.
2. The increased rates of freight and insurance, which applied to the whole period of the war, but which in the last six years of it amounted (as will be seen when the period comes under consideration) to an enormous charge on all importations from the continent of Europe. And, although the greatest charge under this head applied to our foreign trade, there was also a great increase of freight and insurance attaching to our coasting trade, forming no inconsiderable item in the cost of all commodities, the more bulky ones especially,such as corn, coals, building materials, &c. conveyed coast-wise. “

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