Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Deleveraging Hedge Funds Drag Commodities Lower

Commodities / Resources Investing Sep 10, 2008 - 05:22 PM GMT

By: Frank_Holmes

Commodities

Best Financial Markets Analysis ArticleLeveraged hedge funds are selling billions of dollars worth of commodities investments to meet their redemption demands, and this is another severe short- term factor driving down prices. Our funds own similar stocks, and thus we are caught up in this powerful force that some have described as a “mechanical sell-off” by hedge funds and banks that need liquidity.

Adding to the downward pressure are other rumors that “rogue” hedge funds are attacking like sharks when blood is in the water. These predators are allegedly aggressively short-selling the stocks that are in the portfolios of their vulnerable peers, which sends prices even lower.


These hedge fund sharks don't care about fundamentals or portfolio turnover; they're just short-term traders hungry for a quick profit.

Record Valuation Lows

We do care about fundamentals, and the long-term fundamentals for the commodities sector stocks look healthy. These stocks are trading at very low price-to-earnings ratios and at large discounts to cash flow. As we have published in the past and featured in these special commentaries, different commodities rotate in leadership each year; however, long-term supply constraints have not disappeared, and demand from global infrastructure spending continues to remain robust.

Gold

Oil

Morgan Stanley recently published a research report on the global mining sector that concludes that we are still in the early to middle years of a commodities supercycle. We agree with this viewpoint, given that many of the key fundamental drivers that have sustained this trend remain intact.

We use oscillators as a tool to monitor price movements over a rolling 60-day trading period. The intensity and magnitude of these price swings, which we measure in bands representing standard deviations above and below the long-term mean, can provide a clue that a price reversal may occur.

On the gold and crude oil oscillators above, it appears that those two natural resources are deeply oversold. Gold's price is more than two standard deviations below the long-term mean over the past 60 trading days, and oil is nearly that far down. The price drop has had a profound impact on the price of the equities linked to these resources.

US Dollar

The rising dollar has also contributed to the recent decline in the price of commodities and commodity stocks. Both gold and oil prices tend to move in the opposite direction from the dollar. The dollar is up about two standard deviations over the past 60 trading days—you can see on the dollar chart above that this has happened only a handful of times in the past decade.

You can also see on the oscillator that once the dollar is up two standard deviations, it usually reverses direction and starts correcting to the mean long-term price. If the current rally follows that pattern, we could soon see the dollar again losing value, which would be supportive of oil, commodities and gold.

Commodity Prices are cyclical and move in unison

This chart from Morgan Stanley goes back more than 200 years to show cyclical trends in commodities prices. What you see here is that the upswings tend to be sustained for long periods of time before retreating.

These commodities supercycles often last 20 to 25 years, according to Morgan Stanley's research, and if the current one follows the pattern, we have many years to go before it plays out. The key drivers are the rapid economic growth in China and infrastructure spending in other large emerging markets.

While we're in the midst of a supercycle, there are periods of short-term volatility that can be caused by any variety of factors, among them supply and demand issues, governmental policies and market sentiment.

Infrastructure Spending

The leveraged hedge funds and their problems aren't the only reason for the current volatility in commodities markets. There's also been reduced demand for these resources and worries linger about the tender state of the U.S. economies and the prospects of a deep global economic slowdown.

Infrastructure spending is the foundation of future commodities demand. We are looking at strong and steady growth in infrastructure spending over the next decade, with most of the billions to be spent on building roads, airports, power generation.

More than $21 trillion is expected to be allocated to infrastructure in emerging markets from this year through 2017, most of it in Asia, followed by Russia and Eastern Europe, and Latin America.

China alone accounts for nearly $9 trillion in this long-term estimate and India's share is pegged at close to $3 trillion. Billions more will be spent in North America, Western Europe and Japan to repair and replace aging infrastructure.

The government in Beijing has made it clear that strong economic growth is its priority, even if it leads to higher inflation. But that pace of growth, in China and elsewhere in the developing world, cannot continue without more and better infrastructure. This recognition that infrastructure spending is a down payment on future growth may keep these projects a priority even in difficult market conditions.

By Frank Holmes, CEO , U.S. Global Investors

Frank Holmes is CEO and chief investment officer at U.S. Global Investors , a Texas-based investment adviser that specializes in natural resources, emerging markets and global infrastructure. The company's 13 mutual funds include the Global Resources Fund (PSPFX) , Gold and Precious Metals Fund (USERX) and Global MegaTrends Fund (MEGAX) .

More timely commentary from Frank Holmes is available in his investment blog, “Frank Talk”: www.usfunds.com/franktalk .

Please consider carefully the fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Gold funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in gold or gold stocks. The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 12-31-07 : streetTRACKS Gold Trust.

Frank Holmes Archive

© 2005-2022 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