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Dispelling the myth of rising commodity prices

Tags: Gold, Oil
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As the economies of such emerging giants as China and Brazil continue to grow and add to the size and wealth of their middle classes, many investors expect the supply of commodities will tighten and prices will soar. That's been one of drivers of a decade-long bull market for global commodities such as oil and copper.

But Jeffrey Christian, managing director at CPM Group, tells BNN that investors are mistaken and expanding populations and GDP growth does not inherently produce higher commodity prices.

Examining data from 1850 until the present, Christian says that commodity prices have not been on a one-way path higher.

"You've seen an exponential growth in the consumption of most commodities over that period of time, but commodity prices today are about 38 percent lower than they were in 1850 and if you go back to the bottom of the bear market 10 years ago, commodity prices were half of what they were," he tells BNN.

"Just because the population is going to continue to grow and global economy is going to continue to grow, that does not lead to a foregone conclusion that commodity prices - at least on an inflation adjusted basis -- will continue to rise."

Christian says more efficient techniques in both the use and extraction of commodities have helped to lower prices.

Christian also says that proponents of the peak oil theory, which predicts oil will eventually reach a point of maximum production, and other concerns that the world is nearing a place where demand for commodities will outstrip supply are overdone.

"There's an enormous amount of evidence to suggest that we will never actually run out of oil in the world -- and the same true is of copper, silver and grains," he says. "If you look at the increase in yields in agriculture per acre of output and if you look at what agricultural experts are projecting for increase in yields for [agricultural commodities], you see that there is tremendous capacity to increase production."

"Yes, on a theoretical level you could run out of production, but on an empirical basis the evidence suggests that won't happen," he adds.

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