Sitting on a Gold Mine

 

Oil, iron ore and gold prices are currently around the highest level seen in the past 110 years.”

Credit Suisse, 2011

The boom has been driven largely by rising demand from emerging markets as well as concerns over supply and availability. Of course it is true that long-term commodities scarcity may become a problem, but a significant cause of recent price spikes and troughs is that commodities’ supply is very inelastic. For example, it may take between 10-20 years to confirm a viable discovery of a metal like copper or iron, and an average of a further 9 years to bring production online.

This phenomenon has turbocharged the fortunes of many mining magnates in metal or oil-rich nations, as well as those of commodity speculators around the world, now able to directly trade commodities through Exchange Traded Funds. But mining is a risky business. Governments are understandably sensitive to private corporations digging up the very stuff of their nation for profit. And unlike a service or manufacturing industry, commodity-based businesses can’t be moved to avoid regulation or outright takeover.