CommoditiesFundamental Analysis

The Three Sisters of Inflation

A brief look at the three commodities that are said to drive inflation – silver, sugar and soybeans.

In the commodity markets, many inter market relationships exsist.  Crude Oil, Gasoline, and Heating Oil are an example, the same for the bean complex with Beans, Bean Oil, and Bean Meal all being obviously related.  The reason for the relationship is simple and easy to understand.   They are all comprised of a common ingredient the…. Mother Commodity
However history has shown that there is many inter market relationships that are not as obvious.  The reason for the relationship may not be as clear and, like many legends, could be subject to interpretation.  They also are not necessarily as tight or as in sync as the aforementioned markets but nonetheless they do exist.
 Earlier in my career, back in the 80?s, I was fortune enough to work along side what we now refer to as an ?Old School Trader?.  The type of trader who would study not just the chart formations when trading a market like Pork Bellies, he would also consider the current diets of the hog as well as something so benign as the farmer?s personal economic situation.  Why?  Hey even though the bellies may look bullish, the farmer might fold early and dump hogs faster because something you cannot see on the charts.  He needs the money.
Anyway, this ?Old School Trader? told me a story of ?The Three Sisters?, Soybeans, Silver and Sugar.  He explained that in times of coming inflation that these three products will lead the way because of the way the world works.  Before going any further you need to understand that is not going to be some eloquent piece of writing, full of multi syllable words that will leave you wonder exactly what point I am trying to explain.  This trader was extremely simplistic in his trading approach and his theories; he was also one of the most consistently successful traders I have ever witnessed in the last twenty-two years.  He risked little and made money.
To understand this relationship you first need to understand what causes inflation.  This in itself is an argument that will cause you to become bleary eyed and start pulling out your hair unless you look at it in a simple way.  Realistically inflation is caused by ?good times?, in good times people have more money and buy more goods, which lifts demand.  They eat better and buy stuff they wouldn?t normally buy if they didn?t have extra cash, or rubles or euros or what ever they line their pockets with.   So now that you know the secret cause of inflation we will proceed.
Soybeans are the world?s number one food source being the base ingredient of countless forms of food for both humans and the animals we like to consume.  During ?good times? the world will get fatter regardless of what the current diet fad is.  The bottom line is when the world has more money, the first thing  people  do is eat better.
That brings in the second sister, Sugar.  During good times the world is a sweeter place and nothing, repeat nothing sweetens like sugar.  It is the number two-food stuff.
OK, so the relationship of the first two sisters is pretty easy to understand, they are both consumable foods that are found as an ingredient in almost everything we eat.  Now we move right along to the third sister, Silver. 
Silver is one of the few ?precious metals? that is also consumed industrially.  Unlike gold, which is held and horded (they say that Cleopatra?s gold is still in existence) silver is used in industry, which takes millions of ounces off the market annually, never to be seen again in its original form.  Its price, compared to gold is relatively cheap, trading at 40 times less than gold, gives it reputation of being the ?poor man?s gold?.  
During ?good times? the world sees economic expansion.   W hat were once referred to as third world countries come into their own, whether it is because of their natural resources or technological advances or for something as simple as a source of cheap labor.  Economic Expansion entices those who used to be known as the ?have-nots? to want what they have never had.  Think of the old ?two cars in every garage and a chicken in every pot? speech.   Think of the millions of people in a country like China who are tired of riding a bicycle and a diet of rice.  They will soon be driving in their car (that?s computerized system contains silver) to McDonalds for a cheeseburger (made from a cow who ate soybeans) and a Coke (sugar, a lot of sugar).  
The possibilities are endless.

A better example of understanding economics and finance is Robert Shiller's articles in the Wall Street Journal.
Shiller also did an interview with Bobby Ilich on "Words from the Wise" on