Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Commodities After The Crash, No Way But Up

Commodities / Commodities Trading May 09, 2011 - 08:55 AM GMT

By: Andrew_McKillop

Commodities

Best Financial Markets Analysis ArticleAfter a suspiciously short and likely programmed commodities crash we can only have the right hand leg of a "V" profile for commodity prices - until and unless big things happen with the major currencies and national debt crises of most OECD countries, or we have a global economic crash. To be sure, this is the context for highly classic speculative frenzies, where fundamentals are put on the back burner, and the front burners are turned to full on.


By May 9, after a week of slaughter on the precious metals, energy, food and metals exchanges there was no place else to go but up. The commodities rout of April 29-May 6 knocked at least US$ 90 billion of nominal or paper value off the estimated value of all 24 commodities included in the S&P GSCI index. The value of market tradable paper in this group of leading commodities fell to about US$ 805 billion on May 6, from around US$ 891 billion on April 29, according to Bloomberg.

This was a classic - and short - bear squeeze needing very large falls in the nominal value of "underlying assets", commodities themselves, to temporarily drive out the speculators who had been bidding up prices. Signalling the probable degree of advanced preparation and warning for informed players - some call them insiders - Goldman Sachs Group Inc. added its own weight to the rebound. After forecasting the plunge and adding its weight to it in the days preceding April 29, it was predicting price recovery for commodities (announced as "a possible recovery" by GS Group Inc.) exactly one week later, on May 6.

WHAT HAD CHANGED ?

Through March and April in a process dating from the start of 2011, investment funds made near-record bets on commodity price gains, pushing indexes like the Rogers RICI, the CRB, CMCI and the S&P GSCI to their highest levels since late summer 2008. Commodities beat stocks, bonds and the dollar to the end of April, the longest winning streak in at least 14 years. Behind the euphoria was the spectre of penury, with relentless industrial growth in China and India, and other Emerging economies pressuring natural resource production capacities and stockpiles.

More realistically and carefully excluded from market-correct explanations, and even closer behind the euphoria, the continuing fall of the US dollar's world value - the dollar being used to price and transact more than 72 percent of the world's total commodity trades - can only intensify any fundamental factor levering up commodity prices. Retreat of the Eurozone-16's money, the euro, from its current unsustainable highs (measured against the structurally weak dollar) will also tend to bolster commodity price gains against stocks, bonds and currencies, due to the euro now being used to transact - if not price - increasing volumes of physical commodity trades.

THE DOLLAR REMAINS WEAK

To be sure, the Obama team's hunting-and-shooting triumph in Abbotabad followed by a fishing trip to the Oman sea could only drive up the world value of the dollar, but long-term trends and economic reality show the true trend. The US dollar index, measuring the dollar's performance against 6 other currencies, but weighted to give the dollar's performance against the euro some 58% of index weight shows long-term decline as the only main trend - until and unless the euro falls.

Taking performance of the US dollar index July 2010 we have this read out:

The Abottabad adventure is signalled by the 1.2% upward blip on the chart's right hand edge, above, but rather little in this chart allows us to believe there can or might be a longer-term upward recovery in the dollar - although the index will improve considerably when or if European Union monetary disorder goes into higher gear, and the overvalued euro moves backward.

OIL FRENZY
Oil prices best reflect the weakening US dollar and the onrush of central bank "injections" - rather than hits and misses on presidential palaces in Tripoli, and hits on demonstrators in a range of countries from Bahrain and Yemen to Syria and Tunisia, with the largest focus always on possible civil unrest in Saudi Arabia, potentially affecting oil production and exports. Oil prices also reflect claims by the OECD's International Energy Agency and large oil companies like Total, claiming Asian oil demand is very strong, while the US Energy Department's TWIP shows relatively high US oil inventories, and European oil consumption is in many countries still 5% - 10% below 2008 demand level.

The one-liner marketspeak for this context of fundamentals which can be read any way, and unknown geopolitical trends is that the balance of risks and fundamentals still points to a supply-constrained world, not only for oil but almost all other commodities, except US-only shale gas. The financial and monetary risk of a sudden plunge into steep recession, as in 2008, driven by national debt funding crisis, also generates so much new liquidity on financial markets, including commodity markets, that until the global economy crashes commodity price must rise.

Taking estimates for Quantitative Easing by the US Fed, Europe's ECB, Japan's BOJ and other central banks as 20 trillion dollars since end-2008 we can relate this to the world value of the physical oil trade at a year average barrel price of US$ 100. The issued money and near-money covers more than 12 years of world total traded oil supplies. Oil is by far the world's biggest traded commodity, priced and transacted to a dominant extent in dollars - so the real question, here, is how can its price not rise ?

The unnatural fall in oil prices during the Apr 29 - May 6 crash is shown by the US benchmark West Texas Intermediate falling nearly US$19, and the rest-of-world benchmark Brent falling US$ 21 in the 5 days of last week. From the bottom point of the "V", rebound could only be as much as 3.5%-per-day in a technical rebound offering zero risk gains for the best-informed market makers and players.

THE REAL GATEKEEPERS
To be sure there is no watchdog in a mass speculative bidding spree that favours commodities more than equities, but the very small size of most commodity markets makes for self-limiting feedback. This size limitation applies firstly to value and turnover, relative to vastly bigger equities markets, and to the special characteristic of commodity markets: physical deliveries and transactions.

Silver is the best recent example - despite the fantastic drubbing taken by silver prices during the Apr 29 - May 6 crash, the largest global silver market, the Comex, is in permanent physical shortage of the metal. Several of the food commodity markets are highly vulnerable to cornering and to physical under-supply. With rising prices, soothsaying of the Goldman Sachs type will give way to physical rigging, producing what many analysts already claim is happening: market movements with no relation at all to underlying fundamentals.

The twist is these analysts usually judge commodity prices as overpriced and likely to fall back 10%, or 20% or even 30% from current levels, without warning. The opposite is also possible, and more likely under current conditions: that is massive unexplained price rises in a few days of frenzied trading.

The gatekeepers are the precious metals. When or if gold prices rise above US$ 2000 per ounce, and silver prices attain some level above US$ 65 per ounce, this is a deadly challenge to the US dollar, and its fiat friends and also-rans, starting with the euro, which is already seriously overvalued. From high and sustained gold and silver price levels, the gates of inflation will very surely open wide - making panic rises of interest rates, and slump into global economic recession almost inevitable.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules