Thursday, June 08, 2006

 

Commodities Suffer Another 'Jolt'

A Canadian update from Bloomberg. "Canada's dollar fell the most in more than two weeks against the U.S. currency on concern a global slowdown will hurt demand for commodities. 'The drop in commodity and energy prices is making the Canadian dollar vulnerable to short-term losses,' said Jack Spitz, director of foreign exchange at National Bank of Canada in Toronto. 'These losses may be exacerbated by a global sell-off in equities and concerns on inflation.'"

"The Canadian dollar, which declined for a fourth day, fell 0.9 percent to 89.03 U.S. cents at 5 p.m. in Toronto. It closed at 89.86 U.S. cents yesterday. One U.S. dollar buys C$1.1232. The currency is down from 91.44 U.S. cents on May 31, the highest since Jan. 4, 1978. The currency extended its loss as Canadian new-home construction fell unexpectedly in May, a second straight decline as the nation's housing market cools."

"Copper, aluminum and zinc led a drop in metals prices as central banks in Asia and Europe raised interest rates to contain inflation, threatening to slow economic growth and demand for commodities."

"Andrew Pyle, head of capital markets research at Scotia Capital Inc. in Toronto, said a decline in commodities is a temporary 'jolt' for the Canadian dollar because geopolitical risks and strong demand from Asia are likely to keep prices higher."

"Gold futures closed at an eight-week low Thursday as the dollar rallied on continued expectations that the Federal Reserve will raise interest rates and on news of the death of Abu Musab al-Zarqawi, the leader of al-Qaida in Iraq."

"Gold for August delivery gave up $18.80 at $613.80 an ounce on the New York Mercantile Exchange, marking its lowest finish since April 13 as losses extended into a fourth day. Other metals also fell sharply. Silver was down 81.5 cents at $11.075 an ounce, its lowest level since March 28. Platinum ended down $41.40 at $1,190 an ounce, its lowest close since May 5. Palladium fell $20.50 to $318.25, its lowest close since March 21."

"From a technical perspective, gold is now close to critical support around a $610 to $613 spot price area, Jon Nadler said. If that level fails to hold, gold could move back under $600 an ounce and spend the summer trying to find its bearings.
'Gold will now have to rely on the retail investor and Asian physical buyers returning to the market with open pocketbooks,' he said. At the least, the forecasts for 'taking out those all-time highs might have to be pushed back a few months.'"

"'In any case, the (now) oversold conditions may persist for a while, and perhaps no real reversal upward will take place until some mega-bull pundit 'capitulates' and declares the gold run as having come to an end,' said Nadler."

The Moscow Times. "The Central Bank said Thursday that it had cut the share of dollars in its reserves to 50 percent, diversifying into euros as the greenback's standing as a reserve currency suffers."

"Central Bank Chairman Sergei Ignatyev said Russia now held 40 percent of its $247 billion gold and forex reserves, the world's fourth-largest, in euros, with the rest in sterling and yen. Ignatyev also said he had not lost hope of Russia meeting its annual inflation target of 8.5 percent for 2006, even though consumer prices rose by 5.9 percent price from January to May."

"The composition of Russia's currency reserves has been kept under wraps until now, but Central Bank officials had said its euro holdings were 25 to 30 percent of the total. The new structure is more in line with the proposed currency allocation of Russia's $71.5 billion budget stabilization fund, which is kept in rubles but will soon be converted into 45 percent dollars, 45 percent euros and 10 percent sterling."

Comments:
Great, another lost post. I'll (try to) redo this one in a few minutes. BTW, what do you readers think about getting the M&M blog away from blogspot?
 
"what do you readers think about getting the M&M blog away from blogspot?"

The only difference as far as I can see is that the HB blog threads better, but has no 'preview' feature.

If its better for you to leave blogspot, then lets go!
 
I don't care much for blogger, ben. Even without preview, the hb site is better, imo.

On a different note, I think Morgan Stanley nailed it: [emphasis mine]

The three-year bull run across global markets might be over, giving way to a full-fledged bear market, leading equity research Morgan Stanley has warned in its latest report.

Morgan Stanley said that massive fund flows from the "less experienced retail investors into hot-concept funds like Bric, commodity, India, China" have led to a global financial mania in the past five quarters.

"The mania has formed in an environment of sluggish global liquidity.

Gravity has stopped the momentum, and we think the unwinding is likely to continue," added the report.

When markets are hot, fund managers tend to market their funds aggressively, especially those ones with hot concepts, Xie said.

Tens of billions of dollars have been raised by such funds from less experienced retail investors over the past three quarters in markets like Japan, Korea, Taiwan, while fuelling rapid price appreciation in the recipient markets.

However, inflationary pressure in the US and other OECD economies makes a cyclical bear market likely beyond the ongoing unwinding, the report said.

Morgan Stanley said that the central banks in the US and other OECD countries are likely to further hike the interest rates and keep them higher for longer than expected.

This would lead to a decline in global liquidity and a contraction in the risk asset valuations.

The emerging equity markets and commodity markets have been among the major recipients of funds from long-term investors who have failed to generate big returns in the US.

According to the report, a mania does not last in a tightening liquidity environment and the may sell-off indicates towards gravity working on this bubble.

Xie said that the cyclical bear market in 2001-02 cleaned the excess capacity in the IT sector, while the excess liquidity flowed into emerging markets and commodities.

The report cautioned that Asia was unlikely to become a global growth engine and stand on its own despite a weak us economy. [this argues against the notion that Asian growth will sustain demand for commodities, esp. metals]

 
it seems like everything is selling off. I noticed that the dollar is up against the euro about 3 cents lately. seems people are moving into the dollar and probably US bonds.

the trend hasn't changed, we still have too many dollars out there. our record budget and trade deficits didn't go away. the dollar still has it's problems. the only way to cure them is probably a recession. when stocks resume their secular decline, the dollar is going to be in trouble.
 
a top? this sounds like a top.

"Many people can still recall the lineups at bullion dealers and coin sellers in late 1979 and early 1980. Gold was surging as interest rates and inflation headed well into double-digit territory."

http://www.cbc.ca/news/background/gold/
 
The comments are a lot nicer on the HousingBubble host (though I've never posted there). I'm amazed to hear that they have no preview, that seems like the most basic feature of all.

It's great that BB is turning out to be more hawkish on inflation then we thought, but I still don't see how a hawkish attitude will help when he has the enormous defecit and a collapsing housing bubble bearing down on him. It would appear that he's trying to do the right thing, but I'm not sure there's anyway out of the mess we've gotten ourselves into. Interesting as always.
 
Does he really want to be blamed for causing yet another deflationary depression? Nope, so he must inflate...monetize monetize monetize
 
Ben,

I vote that you move, but only you know the costs involved. Would like that "preview" feature on HB, too!!!


John in VA,

You & Andy have it backwards... it's a cyclical bull, not a cyclical bear. There was nothing left in the tank after 2000 for a secular bull to continue. The last few years have all been credit-fueled excess and not sustainable growth.

Additionally, China & India may not drive commodity demand higher, but they certainly aren't going to stop altogether, either. There's no going back.


SilverHwk,

It's one thing to talk the talk. Let's see him walk the walk!
 
This comment has been removed by a blog administrator.
 
You & Andy have it backwards... it's a cyclical bull, not a cyclical bear. There was nothing left in the tank after 2000 for a secular bull to continue. The last few years have all been credit-fueled excess and not sustainable growth.

tj, they're all symptoms of the same disease: stocks, housing, commodities -- all speculative frenzies fueled by way too much liquidity in the system. It's as plain as the nose on your face (assuming of course, that your nose is of the ordinary variety) Can't you see that now the same tide that lifted these boats will lower them as well as the liquidity tide recedes? In other words, if you think that liquidity will remain high enough to support commodities, or that BB will drop money from helicopters as he once suggested, you should be bullish on stocks and real estate as well.

Additionally, China & India may not drive commodity demand higher, but they certainly aren't going to stop altogether, either.

Who said anything about stopping? They don't need to stop in order for the commodity bubble to burst, they just need to slow down. People haven't stopped buying houses or tech stocks -- or tulips, for that matter. And India and China will slow down dramatically if the U.S. consumer hits the brakes. China, with it's rampant corruption, communist government-controlled industries, runaway speculation, housing bubble, and shaky banking system, could come toppling down just like that last Asian juggernaut, Japan, did in the 1990s.
 
(if you think that liquidity will remain high enough to support commodities, or that BB will drop money from helicopters as he once suggested, you should be bullish on stocks and real estate as well.)

as marc faber said, the dow could go to 30,000- but gold would go there too. dow up 3X, gold up A LOT more.

if liquidity is the story, how do you explain the 30s and 70s? anyways, liquidity doesn't always flow into stocks. eventually the liquidity will be recognized as inflation and hurt stocks and homes.
 
I forgot, it's also more than a liquidity story. it's the fact that supply was down while commodities were in a 25 year bear market. will they go down for another 25 years? no. whatever hits us, will just be a nasty correction for commodities. like I've said, I think we'll see a deflationary recession. most assets will fall hard. commodities could fall 30-40%. but in the end, gov'ts and CBs will print money. that's what they do. as SD CDL said, that's what they're trained to do. when they do that, the only thing in demand will be commodities. you won't want stocks and you won't need(or be able to afford) a home.

you need OJ, you need rubber and you need sugar.
 
sorry for the third post in a row, but we haven't even talked about the dollar yet. lots of dollars destined to leave the US and central bank reserves for safe haven of commodities...

U.S. April Trade Deficit Widened 2.5% to $63.4 Bln
 
you need OJ, you need rubber and you need sugar

Sure, and you need houses. We're probably not too far apart in our assessment of the market, john. My claim is that commodities are in a bubble that will pop (or is popping, perhaps). My claim is not that commodities will enter a long-term bear market. In fact, I think that the best thing that could happen for the commodities market is for a bubble burst (which you refer to as a nasty correction), at which point they could probably resume growth at a more measured pace -- assuming the world economy remains relatively healthy. I believe the exact same thing with respect to the housing market, although the relative illiquidity of RE may cause this to play out over a longer time horizon.

My positional all along has been that speculation has overtaken fundamentals in driving price growth in commodities, just as it has in RE. It is not my position that there are no underlying fundamentals supporting a long-term growth trend in commodities (again, assuming that the U.S. and world economies remain stable).
 
For me an investment in Gold is a way to short sell...in this case I'm short selling the US Govt.
 
Rumor has it that the word came down from Washington to hammer the price of commodities, mainly gold and oil. This was done by using their henchman on Wall Street, big investment banks, including JP Morgan Chase and Goldman Sachs. These guys now have huge short positions in Gold. Washington has also been able to convince the Saudis to keep pumping oil at near max output. The price of oil hasn't dropped as much as they had hoped, but I think it will. Soon.


Why you ask? It's kind of hard to have a rate pause when gold is at $730 and oil at $75....and I really believe they want to pause, but they can't. The Gov't understands we are on the brink of recession, if not already, and the housing bubble is going to turn it into a severe one that could lead to deflation.

Once the Feds stop raising rates gold start to rise dramatically again.
 
John in VA,

To some extent we're splitting hairs. Yes, liquidity has been a factor in everything lately. However, it simply threw fuel on the fire for commodities, whereas stocks & housing would have gone nowhere but down without it.

Now that liquidity is being withdrawn, housing & stocks *will* go down, whereas commodities will only surrender their most recent gains (i.e., those that you've labelled the most parabolic).

Oh, and people (and core businesses) don't need to buy homes and/or stocks like they do commodities. Regardless of the state of our (or the Chinese or the Indian) economy, a certain level of demand is guaranteed. That demand will continue to exceed supply... it'll just vary the degree (and therefore the rate of price growth).

Given the overbuilt state of RE and the overbought state of stocks, both of those will see demand lagging supply for years to come.
 
Rumor has it that the word came down from Washington to hammer the price of commodities, mainly gold and oil.

I'm not sure I'd consider that a rumor, jdog. BB basically came out and said as much last week, when he said that commodity prices are causing inflation and he's going to keep raising rates to get inflation under control. Not a lot of dots to connect there.

This was done by using their henchman on Wall Street, big investment banks, including JP Morgan Chase and Goldman Sachs. These guys now have huge short positions in Gold.

I like to put conspiracy theories like this to the "which-is-more-likely" test. For this one it would be, which is more likely, that:
a) a cabal of administration insiders and Wall St. heavyweights got together in a big cigar-smoke-filled cone of silence to plot the demise of the commodities markets, OR...
b) Wall St. traders and hedge funds saw what was plainly obvious in Bernanke's comments -- that he's targeting the commodities bubble -- and acted in accordance with the good-old-fashioned profit motive and the age-old adage "don't fight the Fed"

I pick b)
 
thejdog,

Fortunately for us, those actions will have limited, short-term effects. In the meantime, think of how many more ounces you can collect for your money! ;-)
 
I highly recommend you guys read this:
http://www.financialsense.com/fsn/BP/2006/0603.html
John in VA, perhaps A) might be more in play than you realize.
 
I agree on housing, tj, but not necessarily on stocks. The long-run average gains for the Dow Jones is around 10%. Back in 1995, the Dow was at 4000. Projecting that out 11 years at 10% yields 11,412. So stocks aren't especially cheap right now, but they're not overbought at these prices -- probably a bit oversold, but I expect them to go down a bit further (overshoot on the way up and down).

If you're a short-run speculator (and I don't mean that in a pejorative sense), you can profit from timing PMs right. If you're investing for the long run, it is indisputable that stocks trounce gold. Absolutely no doubt.
 
TJ - Yes. GLD was down to 59.71 today about 1/2 hour ago. That's equal to $597 gold...way oversold. I bought a nice little chunk at $59.78. 5 minutes later it was at $60.29. Finally settled at 60.14 which is still oversold.

John_in_VA - Who said anything about conspiracies and a the cabal smoking cigars or whatever?...It is a well known fact that big banks and brokers have VERY close relationship with the US GOVT. So close in fact that it's hard to tell who they are woking for some timees. Just look at the way some of these jump back and forth with jobs between the two.

There are several critically acclaimed books on the subject. I would suggest reading one. I'd be more than happy to recommend one to you..
 
All I'm saying, jdog, is that I don't believe there's anything mysterious going on between Washington and their Wall St. "henchmen". Bernanke telegraphed his intentions to everyone last week. Wall St. traders simply acted on that information.
 
(If you're investing for the long run, it is indisputable that stocks trounce gold. Absolutely no doubt.)

how long are we talking about? listed companies come and go. you have to be able to pick the rights ones. I can give you more than a few studies that show commodities have better returns thans stocks. there aren't that many companies that are as old as some of the coins I have. there are a lot that have gone bust. very few companies from the original dow jones index have survived.
 
If you're investing for the long run, it is indisputable that stocks trounce gold. Absolutely no doubt.

Okay, somebody's been drinking too much Wall Street kool-aid! I'll have to go back to my Mauldin books for the exact figures, but this one is highly disputable.

Bernanke telegraphed his intentions to everyone last week.

It wouldn't surprise me if some parties got the news a little earlier and more directly...
 
You know I can see where John in VA is coming from...conspiracy theorist suick..and there are sooo many fruitless ones that the few that are legitimate are discounted. I'd would say it's a very succesful job of discreditation by the CIA, but we all know they are mostly bumbling, fumbling idiots. No..it's the media, unwittingly maybe, but they are the ones who discredit ALL "conspiracy theories". I'm sure it's more out of fear.

Make NO mistake though, there are some theories that have been proven. Very diustubing stuff like the CIA and drugs, MIAs in Laos, Mansoto and their milk growth-hormone, the cover-up of TWA flight 800 etc...ect. All proven to be fact, but yet discounted by the media. Perception.

Not to bash on you at all John because I love your takes and you are a very intelligent individual, but like another poster said you've drank the kool-aid. Free your mind a bit and educate yourself. Again I can recommend several books that will change your opinion, maybe just a little, but they will.
 
The new HB blog is nice, ok even, but hard on the dialup.
I visit the MM blog because it is dialup friendly,... and the posts, and the fact it is 6months ahead of anything.

All assets decline...
More vi-o-tility...

Has there been that much vi-o-tility?
Me-thinks, no.
What is a great vi-o-tility? Twenty bucks? Me-thinks, heck-ov-alot-more-N-that.

If commodities go thru the roof and all other assets dcline, is that the road to hyperinflation?
 
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