What will happen to commodities in 2011?

First, consider the following:

Commodities are up across the board, in some cases quite dramatically. This boom is international — manufacturers are bidding up prices and there are strains on available supplies.

Yet consumer prices are not rising significantly. Canada currently has a higher official inflation rate than the US, but not much more. Commodity prices have been bid up in anticipation of rising consumer demand, a prediction which is not panning out.

Remember the insight of Austrian economics — consumers set final prices, not producers. Consumer spending is weak. Unemployment remains high. Without a surge in consumer spending, these prices are unsustainable. If there is a recession in Asia, and I think there will be (probably next year), then these prices are likely to tank.

Western banks are stockpiling excess reserves. If this money does not get lent out, unemployment will remain high and consumer spending will continue to suffer. There are no signs that bankers will suddenly become optimistic. China is slowing down. Same with South Korea and Japan.

What about gold? Gold follows a different set of rules. Central banks buy and sell gold. It is a hedge against the currency crises and mass inflation, rather than recession, where currency appreciates. China is encouraging its citizens to buy gold. When Austrian business cycle theory bites back at China’s bubble, there may be less drive to build shopping malls where no one buys or sells anything, but people will still yearn to preserve their savings with the precious metal as their government devalues money like its going out of style.