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"Thanks Bill for your hard work and this wonderful blog. And thanks everyone for your thoughtful inputs.

My question is if the precious metals and base metals will move along each other in this journey? Will it be possible at some time down the road that precious metals keep going up but base metals peak or start to drop?

Thank you very much for your comments. This community is very educational."

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As long as crude oil is going to be traded in USD, the world needs to reflate. The demand from emerging economies will be so huge for oil that we need to pay for it in wooden nickels. Otherwise we'll all be working for nothing, i.e., all our disposable income will be going to pay for fuel for our cars and homes.

So what if the cost per gallon of gas is $3.00, $4.00, $5.00 or $10.00? A Dow at 12,000, 15,000 or 18,000. Your home priced at $500,000, $1 million, $2 million. Gold at $700, $1,000, $2,000. Copper at $2, $3, $5. Everything is relative.

Inflation is inevitable.

The key to determining commodity prices (relative to the currency they are priced in) is the rate of inflation, and that is why governments in the U.S. (and everywhere) try to camouflage this number. But we're all adults here, so why the games?

When the rate of inflation is rising/high (this morning's economic data indicates so, and it has for a couple years), then we need to switch from heavy weightings in interest-sensitive stocks to heavy weightings in stocks of commodity producers.

And when the rate of inflation is falling/low, as it was from mid-1981 into 2000, we need to avoid the commodity-producers and primarily stick to stocks of interest-sensitive companies or companies that are highly dependent on commodities.

That's not so difficult a concept to comprehend, is it?

But why will oil and metal prices continue to rise?

Well, we all agree that the evidence is undeniable that China and India are going to grow so rapidly in the next 20-40 years that their economies will, at a point, bring GDP per capita (purchasing power parity) much closer in line with persons living in U.S., Canada, Japan, U.K. and Western Europe.

But what does that mean?

In 2005, China reported GDP per capita of US$6,300, and India $3,400. That puts about 2.4 billion persons with an average GDP pp of US$5,000 compared to about US$33,000 pp for 900 million people in the advanced economies.

I think that too many of us are missing the point that the world will grow much faster in the next 20-40 years than at any time in history simply because of the sheer size of China and India. This economic expansion is going to bring enormous demands on energy, metals and food production, and that will lead to huge inflation pressures when growth of supply is not able to keep up.

That's exactly what is happening today.

The fact is that since the end of World War II, except for periods of smaller wars, there has been sufficient oil and metal discovered and refined into useable products to more than meet economic demand, which kept the price of the commodities low.

When demand outstrips supply, the price rises, obviously. But, when demand becomes as extreme as it is today with about 38 pct of the total population of the world living in nations growing GDP at an average +10 pct per year, it creates an extreme upward pressure on price.

In a past few years the price of oil has increased five-fold, and now the metal prices are in the process of doing the same because the demand for these commodities is there. And as long as inflation in those countries remains fairly moderate, then interest rates will remain low enough there to facilitate further periods of +10 pct annual growth unless international factors come into play.

At that pace of economic growth, demand will always lead supply, and there appears to be no slowdown in the growth, so there is no stopping the price rise of the metals.

The advanced nations can either raise interest rates enough to create a global recession or depression, in order to slow or stop that demand, or they can reflate to the point where oil and metals are bought and paid for in wooden nickels. By that I simply mean that the value of financial assets, including money, becomes much less so when growing at a faster rate compared to production of physical commodities.

The keys to rising prices for all metals and oil, then, are (i) GDP growth rates in China and India, and (ii) inflation rates in China and India.

In terms of the implications of GDP growth in China and India, a reader sent me the following article. I think it makes a reasonable case for extreme long-term growth in demand " not just for oil but for aluminum and base metals like copper, nickel and zinc. But, long-term, I don't know where the supply is going to come from.

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Bill, look at this:

Re: Oil prices will soar by: bzusa6 (53/M/Belo Horizonte Bz) 05/01/06 04:38 am Msg: 2685 of 2686

Regarding , I saved this post from another board awhile ago and repost it when it appears reasonable to do so.

"by: brehm233 08/20/05 09:28 pm

Take a look at the following comparisons. It may not be valid to extrapolate these numbers relative to China and India, but some modicum of growth is inevitable.

U.S. oil consumption in 1900 - 1 barrel/per person/year
- U.S. oil consumption in 1970 - 27 barrels/per person/year

- Japan oil consumption in 1950 - 1 barrel/per person/year
- Japan oil consumption in 1970 - 17 barrels/per person/year

- South Korea oil consumption in 1965 - 1 barrel/per person/year
- South Korea oil consumption in 2005 - 17 barrels/per person/year

- China's current consumption - 1.3 barrels/person/year

- India's current consumption - 0.7 barrels/person/year

Even 1bpd extra demand from China and India would be 5.5mbpd.

The EIA reports 100,000 bpd of slack supply:

According to the U.S. Energy Information Administration, global oil production hit 84.5 million barrels per day in May (the latest numbers available) and demand in the first quarter averaged 84.4 million. That leaves a margin of about one-tenth of one percent.

One of the most dangerous statements to make in the market is that its different this time."