Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19
The Exponential Stocks Bull Market Explained - Video - 13th Mar 19
TSP Recession Indicator - Criss-Cross, Flip-Flop and Remembering 1966 - 13th Mar 19
Stock Investors Beware The Signs Of Recession / Deflation - 13th Mar 19
Is the Stock Market Still in a Bear Market? - 13th Mar 19
Stock Market Trend Analysis 2019 - 13th Mar 19
Gold Up-to-Date' COT Report: A Maddening Déjà Vu - 12th Mar 19
Save Fintech? Ban Short Selling. It's Not That Simple - 12th Mar 19
Palladium Blowup Could Expose Scam of Gold & Silver Futures - 12th Mar 19
Next Recession: Concentrating Future Losses & Bringing Them Forward In Time As Profits - 12th Mar 19
The Shift of the Philippine Peso Regime - 12th Mar 19
Theresa May BrExit Back Stab Deal Counting Down to Resignation, Tory Leadership Election - 12th Mar 19

Market Oracle FREE Newsletter

Stock and Finanacial Markets Trading Analysis Worth

Who’s Right About Commodities: Bears or Bulls?

Commodities / Commodities Trading Oct 19, 2011 - 04:39 AM GMT

By: Marin_Katusa

Commodities

Best Financial Markets Analysis ArticleMarin Katusa, Casey Research writes: In the last few weeks a slow slide in commodity prices – metals in particular – has turned into a full-scale nosedive.

All through 2011 copper had remained essentially between US$4 and $4.50 a pound, but on September 11 it dropped below that range and didn’t really stop falling until October 4, when it bottomed at $3.05. Aluminum gained ground in the first half of the year to reach $1.24 per lb. in April, but after losing 10% in the last 30 days it is back below that, at $0.96. The spot price of nickel lost 19% in the last month; zinc prices fell 17%. Precious metals were not spared either: The price of silver shed a whopping 33% in 30 days, while gold is currently down 15% compared to its price on September 6.


Grouping the commodities together really shows how rough the last few months have been. The Standard & Poor’s GSCI – an index of raw materials that tracks 24 commodity prices – is down 24% since April, when it hit a 32-month high. On October 4 it touched 572.92, its lowest level since November 26, 2010. Falling metal prices were the main culprit: Silver closed at its lowest price since February, and copper saw its cheapest settlement in 14 months.

The slide in commodity prices ends a period of discord between a global economic story of frailty and impending doom and commodity prices that were holding their ground at or near record highs. The disparity stemmed in large part from opposite outlooks for the world’s developed and emerging economies – Europe and the US are struggling to maintain any kind of economic momentum but emerging economies have continued to grow, led by China. Investment actions (encouraged by the printed money stemming from QE2) then heightened that difference, as investors turned to commodity prices to profit from emerging-market growth.

The investments that fed the disparity came from a very broad base. It used to be that investing in commodities was only for institutional players and real market participants, but over the last decade a slew of retail investors have jumped on board the “good-times commodities train.” Since the start of the current commodities supercycle in the early 2000s, investing in raw materials shifted from a risky, hard-to-access game to a commonplace portion of most portfolios.

Before, most ordinary investors were only exposed to commodities by owning shares in oil or mining companies. Now, a broad range of commodity-based exchange-traded funds (ETFs) spanning agriculture, energy, and metals have given investors access to direct exposure to raw-material price swings… and the sector has provided such consistent rewards that many financial advisors and pension managers now believe that all ordinary investors should have some slice of their long-term money parked in commodities. The assets of ETFs and similar investment products that hold baskets of commodity futures have increased sixfold since 2007, reaching a value of $37 billion this summer.

In recent months, however, the tide has turned in a major way. Investors and advisors are beating a hasty retreat from all risky holdings, and for many that includes commodities. Current global economic uncertainty is pushing investors toward very low-risk options, starting with US bonds and ending with dividend-paying utilities. Commodities, which were previously better-insulated from retail investor panics, are feeling the pain.

Of course, retail investors abandoning ship only account for a small part of the pressure on commodity prices. Commodity prices are complex beasts, with annual variations relating to contract talks, stocking seasons, de-stocking seasons, currency ratios, and speculative action.

Take copper as an example. China accounts for something like 40% of global copper demand, and its unceasing demand growth helped copper prices rebound quickly after the 2008 recession. Whether this demand growth will continue is a topic of much debate.

The bears point to tightening monetary conditions and a global slowdown to argue that China’s economy will grow just 5% this year – a sluggish rate, compared to its double-digit expansions over most years in the last decade. They also point to reports of very large speculative stockpiles in China, accumulated in part as a way to skirt bank lending restrictions imposed by the Chinese government. The copper bulls, on the other hand, argue that demand is holding up well. Volumes at most companies are still up year on year; even in Europe, Germany is still showing reasonable growth; and in the United States the copper rod market is expected to register 3% growth – that would be down from 6% last year, but it’s still growth. As for China, the bulls expect 8% economic growth and say it is merely a matter of time before the Chinese return to the market and restock heavily. Minmetals stoked that fire somewhat last week with its C$1.3-billion bid for Anvil Mining (T.AVM), a copper company.

In addition to all of those factors and arguments, the scrap market plays a role. The “urban mine” of recycled metals accounts for roughly one-third of global supply, but as prices fall scrap flows slow down significantly. That tightens the market even if demand also weakens. Many scrap dealers are holding on to their copper until prices recover; they did the same in 2008-‘09, helping to push prices up.

So commodity prices are complicated and difficult to forecast at the best of times, which is not exactly how we would describe things at present. Yes, that’s our lead-in to saying that predicting where prices are going from here is a challenge, to say the least.

Again, let’s use copper as an example. Copper price forecasts now range from below US$6,000 per tonne (from the head of the copper department at Minmetals) all the way through to $10,075 (from Barclays Capital). Goldman Sachs, Credit Suisse, and Standard Bank are closely aligned in their outlooks, all expecting copper to sit just under $9,000 per tonne through 2012.

Certainly, the fundamentals of the copper market remain very tight. Based on current demand predictions, the International Copper Study Group expects to see a deficit of 250,000 tonnes in the global refined copper market in 2012, before moving closer to balance in 2013. To put 250,000 tonnes into context, global demand for refined copper products in 2010 averaged 19.4 million tonnes. And it is important to remember that current and forecast copper prices all sit comfortably above the break-even point for producers. The marginal cost to produce a tonne of copper averages between $4,000-US$5,000, creating a solid floor for spot prices.

But as one Credit Agricole analyst pointed out, “the fundamentals just won’t matter in a financial panic.” We’ve already seen some of that irrational movement: Copper’s lowest point this week, of $6,635 per tonne, represented a 33% decrease over just two months. The metal boasted a spot price just below $10,000 at the start of August.

Really, commodity prices from here will depend on whether Greece defaults in an orderly, supported manner or goes down in an uncontrolled inferno, torching Europe’s books for years. Both are still options. A planned default has its downsides – as German Chancellor Angela Merkel puts it, “If we tell a country ‘We cancel half of your debt,’ that’s a great deal. Then the next guy will immediately show up and say he wants the same.” Nevertheless, the only way Greece can survive its suffocating debt levels is through some kind of default, and if the European Union can come up with a default management plan, then the other countries of the Union could be protected from the worst of the fallout.

An unplanned, “oh-my-God-how-did-this-happen?!” style Greek default, on the other hand, could decimate numerous European banks and in doing so create exactly the same maelstrom that gave birth to the 2008 recession in America.

Despite some bearish indicators and a lot of nervous investors, a recession is not necessarily in our future. Goldman Sachs, the permabull of commodity price forecasters, remained committed to its prediction that commodities will continue to outperform. While reducing its oil and copper forecasts for 2012, the bank reiterated an “overweight” recommendation on commodities over the next 12 months, explaining that the turmoil in Europe will take away “some of the upside” to commodity prices, but will not reverse prospects.

“With recent GDP revisions by our economists falling hardest on Europe but with emerging market growth expectations still relatively solid, we continue to believe that demand growth in 2012 will be sufficient to tighten major commodity markets,” lead analyst Jeffrey Currie wrote. The group sees potential for commodity prices to climb as much as 20% over the next year. Goldman did reduce its forecasts for oil and gas: The bank now expects Brent crude to average US$120 per barrel over 2012, down from an earlier prediction of $130, and expects copper to trade near $9,500 per ton, down from $11,000.

Barclays Capital added its voice to the chorus that is trying to remind frantic investors that a recession is not guaranteed, agreeing with Goldman that emerging markets could still save the world from a significant recession while also limiting further commodity price slides.

Many people are still hopeful that that chorus is singing the truth: These days any and every sign that we can avoid a recession sparks a bull market day. On October 5, the day after copper, oil, and silver all hit multimonth lows, commodity prices across the board gained ground after Federal Reserve Chairman Ben Bernanke said the central bank would take further measures to prevent a recession if necessary. Bernanke said the Fed could ease monetary conditions further, following the launch of Operation Twist in September.

We think it is likely that the commodities which fell in September and early October were following the example set by oil in early August. Crude prices were too high, having failed to fall in response to increased stability in Libya and weakening demand. So they corrected: Brent crude fell about 8%, while WTI crude lost roughly 14% in late July and early August. Since then crude prices have been fairly stable; they dropped somewhat while other commodities were flailing in September, but not dramatically.

So perhaps the metals realized they were overvalued, like oil had been given the global economic climate, and corrected. If they are following oil’s footsteps, things should remain relatively stable from here. But, as mentioned, that would require an orderly Greek default. And given that the Greek debt “crisis” has now been going on for two whole years and Europe’s leaders have continued to respond with solutions that are too little, too late, a significantly proactive step such as planning for Greece’s default may be too much to ask. And in the case of a frantic and disorganized default, commodity prices could easily drop further.

[Commodity price uncertainties… OPEC supply uncertainties… investing in energy may appear to be too complicated to attempt right now. Learn more about how to get started.]

© 2011 Copyright Casey Research - 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