MacroVoices #401 Leigh Goehring: The Role of Monetary Policy in Commodity Investing
Lee Goehring discusses how commodity prices are currently at their most depressed levels relative to financial assets in 120+ years, similar to periods before major monetary policy regime changes in the late 1920s, 1960s, and 1990s. He predicts significant commodity bull markets ahead, driven by potential monetary regime shifts and dollar devaluation.
Summary
Lee Goehring argues that commodity prices are currently as depressed relative to financial assets as they have ever been since 1900, with only three comparable periods: the late 1920s, late 1960s, and late 1990s. Each of these periods preceded major monetary policy regime changes and subsequent commodity bull markets. During these periods, depressed commodity prices allowed central banks to run loose monetary policy without inflation concerns, enabling massive financial speculation. Goehring explains that commodity bear markets prevented mining and energy companies from generating sufficient cash for reinvestment, setting up future supply shortages. He details historical examples: the 1920s speculation funded by loose monetary policy to help Britain return to the gold standard, the 1960s loose policy that financed the Vietnam War and Great Society programs, and the late 1990s tech speculation period. Each ended with dramatic monetary regime changes - dollar devaluation in 1934, abandonment of gold backing in 1968, and Nixon ending Bretton Woods in 1971. Goehring predicts the next regime change could involve the U.S. losing reserve currency status to challengers like China and Russia developing alternative payment systems using renminbi and gold. He forecasts gold reaching $15,000 by 2035 and expects oil to spike dramatically as shale production peaks. He recommends investing in commodity-related equities rather than direct commodity exposure due to roll yield costs in futures markets, citing historical examples where commodity equity portfolios vastly outperformed direct commodity investments during bull markets.
Key Insights
- Goehring argues commodity prices are currently at their most depressed levels relative to financial assets in over 120 years of modern financial history
- He identifies only three previous comparable periods of commodity depression: late 1920s, late 1960s, and late 1990s, each preceding major monetary regime changes
- Goehring claims that depressed commodity prices historically enable central banks to run loose monetary policy without inflation concerns, fueling financial speculation
- He explains that commodity bear markets prevent resource companies from generating sufficient reinvestment capital, setting up future supply shortages
- Goehring predicts the U.S. may lose reserve currency status to challengers developing alternative payment systems using renminbi and gold settlements
- He forecasts gold reaching $15,000 by 2035 based on calculations relating Federal Reserve balance sheet size to Treasury gold holdings
- Goehring expects oil prices to spike dramatically as U.S. shale production peaks, potentially reaching $160-200 per barrel
- He argues the Permian Basin will peak within 6-8 months, eliminating the world's only significant source of oil supply growth
- Goehring recommends commodity-related equities over direct commodity exposure due to roll yield costs that can eliminate returns over time
- He claims a diversified commodity equity portfolio started in 1929 would have gained 175% by 1940 while direct commodity exposure often produces zero returns
- Goehring believes current conditions parallel the 1970s and expects this commodity bull market to run until 2030 or beyond
- He identifies central bank gold purchases by China, Brazil, and India as evidence of preparation for alternative settlement systems using gold
Topics
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