All Commodities Since the Crusades

The Gist: (1) Commodities have always moved as one, bound by history's tides—from the Crusades to today’s Energy Transition and every war in between all financed via fiscal largesse. (2) As we approach another election, expect the tide to rise again. (3) The breakout in Silver/Gold may be telling us this history is set to repeat.

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As the chart shows, since the time of the Crusades, all commodities have moved in unison.

If you know your history, you’ll notice the data series begins in the early 13th century, not long after the Battle of Hattin (HERE).

This battle marked a major turning point in the Crusades, when the West lost control of the Holy Lands and, consequently, its vital trading routes to Asia.

As one of my favorite strategists and writers, Louis Vincent from GaveKal points out in his piece, Revenge of the Ottomans (HERE), this marked when the European powers would begin to turn to the seas, investing in ships, and building up large navies to circumvent the Arab world’s stranglehold on trade with Asia.

The search for silk, spices, gold and silver in the new world drove the demand for timber to build the ships and agriculture was essential to feed the growing populations, so all commodities moved in unison.

Zooming in on just the last 200 years of history, we arrive at the same conclusion.

One driving force behind this is the basic economic theory of substitution—what I also refer to as commodity arbitrage.

When one commodity becomes significantly cheaper relative to another, we find ways to arbitrage the price differentials via capital investment supplemented often times with government support.

For example, this occurred in the early 2000s when corn was introduced into the gasoline pool.

Similarly, natural gas prices drive coal prices.

Electric vehicles (EVs) represent another form of arbitrage, exchanging a hydrocarbon-powered mode of transportation for one dependent on copper and other metals.

However, this can also lead to unintended consequences.

In theory, as copper and metal prices rise along with trade tariffs EVs become less competitive and the internal combustion engine (ICE) may start to look more appealing once again.

EVs now have to compete for power with your local data center which is demanding ever more generation capacity thus helping to drive up electricity prices.

It’s happening today in Europe, where the higher cost of diesel has pushed consumers to consume more gasoline.

Source: Rory Johnston of Commodity Context

Meanwhile, diesel demand has waned.

Source: Rory Johnston of Commodity Context

But there are larger factors at play. Commodities move together not merely due to supply, demand and substitution effects but because governments control the printing presses.