One interesting question is why China is scared of a price rise in commodities—whether it is garlic or gold!

Like the bubble syndrome in garlic and gold, there are other similarities between the two commodities. One telling reason why garlic prices have gone through the roof is speculation. Like in gold which is a speculation-driven commodity on Comex, wholesale suppliers and traders in commodities across China have created an artificial boom in garlic prices by indulging in rampant speculation.

Here is a great comment from columnist Joseph Christian of China Daily on garlic speulcation in China:

“Chinese garlic farmers gave up on the pungent crop last year when low garlic prices limited their profits. It doesn't take a rocket scientist to figure out what happened next. Everyone from jobless young men to coal mine bosses started snapping up all the garlic in sight. Some made hundreds of thousands, some made millions. There were new cars in the garage and cheek to cheek grins; but they were the lucky ones."

"I hate to put a damper on the fun but any economics textbook tells us that too much liquidity in the market ripens the chance for speculation. And speculation is exactly what the garlic market reeks of right now."

"Speculators with the bank's money or their own have driven garlic to an unreasonable price. To better understand, consider if this 50-fold increase happened with something we use every day like drinking water. Last year I ordered an 18.9 liter bottle of drinking water for 10 yuan. This year that same bottle of water would cost me 500 yuan. Who in their right mind is going to pay 500 yuan for 18.9 liters of water?”

There is also another interesting aside to this garlic story. Do you know that the United States is the largest importer of Chinese garlic? Yes, last year, America imported nearly 200 million pounds of garlic worth more than $80 million from China.

Now let us wait and watch where is garlic and gold are heading. As Chinese warn, are garlic and gold on a bubble?

David Lew is a bullion commentator with Commodity Online. You can contact him at info@commodityonline.com

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