Two recent discussions about resource prices conveys much good information.
This morning I was greeted with a discussion in the blogosphere about oil prices. As Russ Roberts explains, the Hotelling principle, that prices of resources of fixed supply should rise at the market rate of interest, cannot be applied to oil, if for no other reason that it ignores the cost of extracting that oil from the ground. In general, depletable resource prices are determined by these factors: above-ground stocks, below-ground stocks, costs of converting below-ground stocks to above-ground stocks (”conversion costs”), and total demand for the resource (consumption demand plus reservation demand). Julian Simon famously showed that virtually all depletable resources have shown a history of secular real-price decline during periods of growing use. The conclusions must follow that either more below-ground stocks are being found or that conversion costs are decreasing, or both.
Now, enter the interesting case of silver. Ted Butler has long been on the offensive to expose an alleged silver market manipulation. His reasoning generally goes like this: Annual silver conversion is lower than annual silver consumption, and has been for at least 10 years. Silver consumption is not flagging -- if anything, it shows a continuing upward trend in applications such as photographic chemicals, electronics, and ornaments. The price of silver over this time period (until very recently) hasn’t budged. So, above-ground supplies fall, demand increases, and prices remain flat or fall. Something smells fishy. Michael Gorham of the CFTC released a letter on May 14th, explaining away the specific allegations of price manipulations. In the heart of the letter, Gorham claims that the reservation demand for silver is just very inelastic. But maybe there’s another angle.
