Long term commodity price cycle
Posted by Danny on April 27, 2013
In a recent article posted by NASA, the possibility that we may be entering a Maunder minimum type period of global cooling was openly discussed. The current very weak solar cycle 24 is supporting that hypothesis.
This prompted me to take a closer look how long term solar activity has influenced commodity prices in the past.
The sun is known to be in an approximately 11 year sunspot cycle, which is half of the 22 year solar magnetic cycle.
This means we can filter out these 11 year and 22 year fluctuations by calculating a running 11 and 22 year average of the yearly sunspot number.
The yearly sunspot number since 1700 can be found at the SIDC site : http://sidc.oma.be/sunspot-data/
Calculating the running 11 year and 22 year averages we get this chart (click for larger image):
Both curves are quite similar. When trying to connect it to long term commodity prices I noticed that peaks and bottoms in commodities (CRB) have lagged the sunspot graph by 15 to 16 years. Or in other words: long term sunspot average has been a 15 year leading indicator for commodity prices.
This image lines up the most important peaks and bottoms with the historic CRB index (source: Bianco Research), using a 15 year lag (click for larger image):
The blue line (22 year running average) sets the long term pattern, with the green line (11 year running average) marking some secondary peaks and bottoms. The correlation is quite remarkable.
And while we don’t have yearly sunspot numbers prior to 1700, it is quite likely that the broader pattern matched sunspot averages in these earlier centuries as well.
We see rather flat commodity prices coinciding with the Sporer minimum until the early 16th century, then a period of rising solar activity and rising commodity prices during the Renaissance. The Maunder minimum brought a long term downtrend in prices, which lasted until solar activity started picking up again in the 18th century.
Listing the main peaks and bottoms in the 22Y sunspot average – “ssn” (blue line):
* Very low ssn: 1826 -> followed by a 100 year low in CRB 16 years later in 1842
* Next major high ssn: 1850 -> followed by an all time high in CRB 15 years later in 1865
* Next major low ssn: 1916 -> followed by a major low in CRB 15 years later with the 1931 great depression
* Next major high ssn was a double peak in 1960 and 1968 -> followed 15 years later by inflation peak of the mid 70s and early 80s
* Next low in ssn: 1981 -> marked the period of desinflation that ended around 1996, 15 years later
* Next major high ssn was again a double peak in 1991 and 2000 -> there was a CRB peak in 2008 and we could thus expect another one in 2015 or 2016 (15-16 year after 2000 peak).
Since 2000 the 22 year ssn is falling rapidly and will probably fall to levels last seen 200 years ago. The same happened in the early 19th century (Dalton minimum), and probably also during the Maunder minimum (17th century). This is a ~200 year cycle.
On these earlier occasions the CRB index dropped 70-80% within 10 to 20 years.
If history repeats then a similar period of deflation would start by 2015-2016 and probably not end before 2030. If the next solar cycle is also weak then deflation could extend to 2045. A 70% decline would take the CRB down to ~140 on the basis of its 2008 peak.
Is it possible?
These earlier periods of deflation during weak solar cycles came as the result of a combination of two main factors: stagnant or declining population (because of famines and war) + technological advances that led to more efficient and thus cheaper production.
That’s a scenario that could repeat itself in the coming decades.
Will the central banks’ easy monetary policies prevent this from happening again?
That’s not so sure. In fact their QE may well make the ensuing deflation worse, when the accumulated debts start imploding under their own weight.
PS: in his newly released book, Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century, historian Geoffrey Parker describes the events of the “Little Ice Age” in over 900 pages. How would our modern society deal with such a cold period: are we better prepared, or worse?