Congratulations, the world's population has crossed seven billion and according to World Food Programme, one billion of them are hungry. While one continues to sympathise with Reverend Malthus on having repeatedly been denied "I told you so" moment by technological advances, the situation is worrisome. Faith provides solace against doomsday scenarios propagated in this context, nonetheless wisdom evokes action.
Serendipitously, financial innovation, contrary to technology, has inflicted a "Malthus" on wealth. The double bill financial crises have brokered in a tumultuous period for investors as well as general populace. In the ensuing recession surviving fund managers are clamoring for viable investments. With shares having taken a beating across the board, real estate bubble bursting and currency positions resembling Russian roulette, commodities appear to be the only option.
In substance human wants have always been only about commodities. To pacify the critics, service providers survive on commodities as well. Any tangible natural substance, which satisfies a want, is a commodity. Admittedly this definition differs from the dictionary meaning but clarifying for the layman, iron is a commodity while a car is a product. Rocks don't satisfy a want, unless you want to throw them on your broker, so are not a commodity. Contrarily gold is universally and frantically desired therefore a commodity.
While currency satisfies our want to be wealthy, it gets excluded from our definition since it is unnatural and at best, an illusion. Interestingly, currency derives value from trade which in essence is all about wanted commodities. Arguably the world of financial innovation has its origins in barter practiced by cave men. Debt is an IOU for goods in future. Accordingly, trade deficits can, in reality, only be eliminated by future trade surpluses.
Prior to the invention of paper money, and globalisation in the information age, life was simpler. Commodity prices followed the principles of supply and demand. Trade was all about bartering one for the other and deficit meant parting with precious gold. Perception of wealth was therefore limited by the supply of gold or silver or other commodities. The grand illusion, paper money, shattered this age-old dogma. If wants could be satisfied by printing on paper, greed, an innate human characteristic was bound to take over. The age of unbridled consumerism was upon mankind.
While technology was the catalyst for improving the quality of life and frustrating Malthus, it was fuelled by unchecked desire enabled by delusions of wealth. Waste not, want not, a sterling ancestral value was at best forgotten and at worst deleted all together from current curriculum. Irresponsible craving to be better than our peers fundamentally impacted the commodity supply and demand equation culminating in skyrocketing prices which continued to appear "reasonable", a fool's paradise.
Nations that craved a comfortable life beyond their means sold their future to nations who were sensible enough to view the avarice of the former as an opportunity. No wonder that the world today is divided amongst nations forced to consider austerity measures and those who worry about investing for the future, having successfully controlled their current wants. Even as the illusion implodes, the scrooge of money will continue to haunt the world, the austere now appear to be lured by its deceptive magnificence.
Even when the mirage existed in all its brilliance, deceiving better sense, speculation irrationally affected commodity prices. Increased demand and speculative commodity bubbles wreaked havoc on poor nations which is why 1 billion remain hungry. Today, with nowhere else to invest, the survivors madly rush towards opportunities to control commodities once again tilting the price balance adversely. The poor shall continue to suffer.
It is highly improbable that the world will have learnt its lesson; greed will continue to be good! Speculative investment, fresh demand from the previously thrifty nations and increasing world population are all expected to put pressure of commodity prices for the foreseeable future. The situation will get further compounded by conflicts and strikes across the global horizon. As the supply gets constrained the demand rises unabated.
Mankind may devise an elaborate web of technology and deception to outwit Mother Nature but against such odds failure is inevitable. All that man builds is puny against natural disaster and paper can never satisfy hunger pangs! The sensible amongst us sought to control resources around the globe, at any price, while we watched gold prices set a new record day in and day out. There were a few Pakistani analysts who had the foresight to project that gold prices will rise inordinately, but analysis minus action is "like a fish without a bicycle".
We had a joke circulating amongst friends that if betting was the norm in Pakistani cricket, unfortunately, maybe the Ministry of Finance should participate, we may lose the cup but at least the budget will balance! While this may have been farfetched but a calculated positioning in gold might have been realistic. Admittedly, we lacked surpluses to invest, but hedging oil prices would have been an appropriate cost reduction strategy for a nation which imports energy. Again coffee table discussions were of the view that even PIA lacked the necessary skills to play the futures market as a strategy to reduce its primary cost, fuel.
For a nation which largely trades in raw commodities, it is perplexing that we remain susceptible to price risk. You can never win against luck. Curiously we remain reactive to the demand side of the equation as well. Successively over the years we have been surprised by shortages in sugar, wheat and fertiliser, to mention a few. Forced buying does not augur well for TCP's performance and neither does forced selling for our exporters. Lack of information to accurately predict domestic demand may be a challenge, but a bigger hurdle is the capacity to lock in favourable prices.
"It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail" Albert Maslow. Maybe it is about time that we increased our inventory of tools. In an ideal world, mankind, having learnt its lesson, would diligently avoid financial speculation thereby permitting demand and supply to set prices, in the real world it is highly unlikely. While the wise abhor speculation, they read the fine print when it is inevitable. The simplistic approach of ignoring the rules of the game is unsustainable in the long run. Risk has to be managed, it cannot be eliminated.
If poker is the only game being played and the cards are stacked against you, bluffing with a straight face is a skill needed in your arsenal. Similarly hedging commodity price risk is not for the weak and inexperienced. Analysing global supply and demand for any commodity requires extensive training and experience, even which may not be enough. Nonetheless it may be useful to carefully tread down this path and build a team which has the skills to manage our country's interest in the global market. It is, has been and will be all about commodities!