naked capitalism

Anonymous says:

“So now it’s official: speculation did have something to do with the run-up.”

eventually we’ll have a better idea as to whether speculation drove commodity prices too high or whether the emergency need to raise cash drove them too low.

long-term charts of crude oil and natural gas don’t suggest that speculative bubbles have now burst. crude hasn’t come down much, especially longer-dated contracts, and nat gas doesn’t appear to be in a bubble in the first place.

gold and silver don’t support the idea. gold’s pullback hasn’t been that big so far, and silver has a tendency to plunge from time to time despite its long-term uptrend.

big agricultural markets are more supportive of your view, though i’ve heard (from donald coxe on thursday, for example) that recent rainfall in north america and australia has knocked down grain and bean prices.

some smaller commodity markets look like they ran up since late january on speculation, it’s true.

but i believe we are still in a secular bull market for commodities and that we’ll probably see new highs in many commodity markets before long.

Yves Smith says:

Anon and Moe,

Please note my observation was not “speculators are responsible for all the recent price appreciation in commidities” which seemed to be your interpretation of what I wrote, but “speculators did have something to do with the run up.” Those are two different statements.

I am hearing from hedgies who are not in commodities (not permitted in their mandate) that their prime brokers are telling them that many hedge funds are selling commodities to meet margin calls (often in other markets; they may like the position and not want to trade it, or feel it’s a good time to take some profits on a successful commodities bet).

Second, there is other evidence of deleveraging. From the Financial Ninja. He overstates his case but also has quite a lot of technical charts that apparently support his point:

Margin requirements have been raised at most of the major exchanges over the last couple of days. More importantly, margin requirements on CFD’s (Contract For Difference) have been raised DRASTICALLY. CFD’s are the weapon of choice for commodity investors. That is literally sucking the life right out of the usual suspects: Oil, and Gold. All other commodities, especially those that have gone parabolic, metals and softs, are getting the same treatment. This is MASSIVE de-leveraging at its best.

A simultaneous bounce in the US dollar isn’t helping any either. The US Dollar is bouncing from deeply oversold territory after a steep steady decline. A protracted bounce WILL SMASH commodities. A protracted bounce is quite plausible as the weakness in the Euro area economies becomes more obvious.

My view is simpler. The wheels are starting to come off the US financial system. As I have stated in other posts, the problem are so large in scale that the US government cannot shore up the underlying assets. Historical comparisons suggest we could be looking at a GDP decline of 5% over two years, with another two years to get back to our current level. That could prove to be optimistic. The Japanese have essentially said we are in as bad shape as they were in 1990.

That will most assuredly lead to a slowdown in India and China, which will put a big brake on commodities demand.

And I am not sure the Fed will be able to get away with turning on the printing presses. The last ten year Treasury auction was terrible. Further debasement of the dollar could precipitate a dollar crisis. If the Fed expands its balance sheet by issuing liabilities (a third world strategy), our trading partners might demand we fund in foreign currencies (we had to do this under Carter).

I am not saying that commodities do not have merit as investment. I still see them as overbought at their current levels.