There’s a funny fact (touted by gold enthusiasts) about the purchasing power of gold. For most of history — with few exceptions — an ounce of gold has been able to buy you pretty much the same sort of thing: a good quality pair of shoes, a belt and a suit.
Somewhere in our psyche, the suggestion is, that’s how much we’d ever really forgo to obtain a little lump of gold: the combined value of what it costs to clothe ourselves properly (since clothes wear and tear over time and always need replacing).
What it also suggests is that any time the gold price trades at more than the collective value of a good pair of shoes, a belt and a suit, chances are it’s massively overvalued. Eventually — bar some major technical innovation which finds a more pressing use for gold — the historical trend will reassert itself.
Arguably, the same is true of other commodities too. Reversion to mean — to the true consumption and replacement value of a commodity — is a really important cyclical force in commodities. If demand increases, the price goes up to the point that economic resources can be incentivised to increase the rate of production to satisfy that demand. Once that production is online — and there is no need to increase the rate of production anymore — the price will and always does descend to the maintenance/replacement cost rate.
Keeping that in mind, here’s a long-term chart of Brent crude, which on Wednesday descended below $35 per barrel for the first time since 2004:
And here’s a shorter-dated chart to compare:
And here’s the gold price:
Whenever consumption demand for a commodity suddenly goes up for whatever reason (like expanding population), producers will benefit in terms of how many additional good quality finished goods and services they will be able to buy with their resources. The nation’s currency strengthens. It becomes a petrodollar. Problem is, once the rate of production adjusts to the new equilibrium, it becomes ever harder to get others to forgo more than the actual consumption/replacement cost of those commodities in terms of the finished goods they can actually be deployed to create.
That’s when a nation which previously depended on others forgoing some share of finished goods for the right to their resources (imports) is exposed to currency weakening. The new equilibrium, in essence, demands them to do more than just provide resources. All things being relative, the currencies of such countries weaken to encourage the build up of finished goods (or services) for their own consumption relative to the rate they were previously consuming at, which in turn boosts demand for the underlying commodities… and so forth.
Keeping that in mind here’s the Nigerian Naira:
The Russian rouble:
The Azeri Manat:
And the Saudi Riyal:
These are the currencies of countries all facing major restructuring challenges as a result of the new resource equilibrium. How they cope with this challenge will arguably determine the geopolitics of our era.
Relatedly, here’s Alan Cameron from Exotix Sovereign Research dept on why it makes sense to expect another Naira devaluation imminently (our emphasis):
From a fundamental perspective, the need for a devaluation of the naira has been obvious for some time, all the more so after the latest drop in oil prices during Q4 2015. What’s different is the official view from inside Nigeria: the sudden change in rhetoric that appears in the budget speech was clearly authorised (if not written) by the Presidency, and was likely to have followed extensive consultation within the upper levels of the country’s economic management. It may also have been timed to coincide with Christine Lagarde’s visit to Nigeria (4-7 January), the IMF Article IV mission (beginning 10 January) or, at the latest, the first MPC meeting of the year (25-26 January).The big give-away for us – in addition to the very obvious change in rhetoric mentioned above – can be found in the detail of the budget. Specifically, we cannot seem to arrive at the official deficit target of NGN2,220bn (US$11.3bn) using the other benchmarks provided in the budget speech, unless we begin to tamper with FX rate assumptions. Under our current baseline scenario, we think the deficit target in the proposed budget would be achievable at an exchange rate of NGN240-250/US$, depending on what other assumptions one makes. (The model supporting this view is available on request.)The change in official thinking around the FX rate appears to have happened more quickly than we expected. At the beginning of November 2015, we argued that we could be stuck with the existing FX regime for another six months or more. No doubt the official thinking was influenced by the fall in oil prices since then, but an equally important factor, in our view, has been the push for more orthodox economic policy from ministers and other insiders with ties to the President. A devaluation would represent a partial victory for this camp, and as such should be seen as a positive, in our view.