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A year ago exactly, everyone and his brother was into general commodities. Gold too, but that is different which we will address later. We had suspected the USD would rally and started alerting subscribers several months before the general commodity market peaked around July 08. After that, the CRB collapsed. Gold took a hit too, but not as bad. Gold stocks got sold off as is typical whenever there are general market sell offs.
Now we are nearing June 09… and guess what? Everybody is now talking about how general commodities are the new haven against the USD, how China is hoarding commodities again, and so on.
And we sent an alert to subscribers again this week that we feel the general commodity sector is again dicey. I just cannot get past the argument that a huge general slowdown in the world economy will not again pull down the general commodity complex (such as copper, oil etc). The only thing I see in the present commodity rally is another speculative bubble. The fundamentals of real demand are just not there, and they are not going to return anytime soon either.
So, how can there be a rally in general commodities that sticks?
The US stock market is up 30% by some measures since its lows. If we are right, and there is no meaningful economic recovery that sticks, there are no earnings to support stock prices, and all this latest stock rally is a bear market rally.
If the general stock market crashes, the general commodity market will also crash. The only thing that might be said to support both the US stock market and the recent rally in general commodities is speculation. You cannot convince me that economic demand is behind any of this. Economic demand is actually worsening, not improving.
But we hear many people saying to get back into general commodities right now, and I am particularly suspicious of the media on this too. This rally does not ‘add up’ at all. So, we issued a warning again to our subscribers to start looking at the latest rallies as temporary. But the clarion call out there is very much the opposite.
General commodities a USD haven? No and Yes
I suppose that the general commodity complex such as oil, copper, etc are seen as potential defenses against a possible USD devaluation/decline. And such a thing is definitely imminent – considering that China is making many moves to spread out the Yuan with currency swaps with their trade partners, among many other things, and the discussion on IMF SDR (special drawing rights that are based on a basket of key currencies).
Well, the US fiscal situation is an unmitigated disaster, with a $2 trillion dollar hole rapidly building in only a year’s time! The Fed is now buying the US’ own bonds. Couched in the opaque name ‘quantitative easing’, the Fed is buying down interest rates by buying its own bonds, but that effort is failing to achieve it.
All the other central banks in the trouble zone – the West- are fighting deleveraging with a great deal of money and actually buying everything in sight, from bonds to stocks to their own banks to real estate. They are monetizing all markets.
Will all that lead to a general commodity rally that sticks? I do not believe so. Yes, in principle all that money being thrown at markets by central banks is inflationary, but there are also deflationary forces at work. Declining economic demand world wide outstrips anything the Central Banks can try by a factor of ten or more. And this will outrun the inflationary efforts, leaving the central banks holding the bag of deleveraging assets. And way more in debt as a result. But, will you get left holding the bag of deleveraging commodities again this year? It’s a good question.
The present general commodity rally is speculator driven on very short term logic.
But economic demand is the real consumer of general commodities, not speculators. Just look at what happened last year to the general commodity sector, here we use the CRB commodity basket index:
If the USD does let go, there will be such currency and stock market turmoil that huge damage will be done to remaining economic demand, and the general commodity complex will turn down fast again, and the speculators will dump out again, just like last year. We have seen this movie before.
A collapsing USD will take everything down with it, probably except gold. Gold stocks might escape a hit this time, if they are now reacting to the USD situation instead of being forced to sell for margin calls. But, ultimately they will recover before the economy does, as the USD gets worse and worse.
OK, so China is hoarding. So what?
China’s hoarding alone cannot even come close to replacing economic demand. Sure, they can buy a lot, but the world consumes way more than what the Chinese might hoard. I know the arguments that the Chinese are looking for a way to use their foreign reserves. But again, that is not enough to replace the entire market demand if we are setting up for another big long stock and financial crash, which will most definitely take everything down with it, probably excepting gold over the mid term from that event.
What exactly the timing would be for another general commodity sell off is uncertain, but I view this particular rally as very dicey. We do have a big wild card with Israel and Iran this summer. That aside, I see little reason for an enduring general commodity bull.
I understand the logic that a USD crisis would cause people to flee into anything real, like general commodities. But before that happens in earnest, a USD crisis would cause so much economic damage that it would probably overwhelm the initial flight into them. Maybe later that would pan out, but that is quite premature at this juncture. That does not mean the present commodity rally won’t continue, but I see it as speculator driven and very vulnerable.
Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com
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The Prudent Squirrel newsletter is our financial and gold commentary. Subscribers get 44 newsletters a year on Sundays, and also mid week email alerts as needed. We alerted our subscribers April 20, 08 that the USD was bottoming. The USD has strengthened significantly since. We also alerted subscribers that gold could rally big in late Nov 08. The alerts include quick notification of important financial news developments by email. Subscribers tell us that the alerts alone are worth subscribing for.
I had one potential subscriber ask me if the newsletter has much more content than these public articles, ie, if it was worth subscribing. The answer is that the public articles have less than 10% of our research and conclusions that subscribers see, not to mention the subscriber email alerts of important breaking financial news. We have anticipated many significant market moves in the last year, such as imminent drops in world stock markets within days of them happening, and big swings in the gold markets within days of them occurring. We have also made a number of good calls on big currency swings, such as with the USD, the Euro and the Yen.
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Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it’s important.
Copyright 2009
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