from Kitco Metals Inc. - "Channeling Newton"
April 2011, 12:00 p.m.
By Jon Nadler
Of Kitco News
News) -- Following Tuesday's worst drop in
commodities in one month, the markets recovered somewhat
during the overnight hours as sporadic bargain-hunters
emerged and were seen as buyers. The slump we observed
yesterday came on the heels of a Goldman Sachs bulletin
advising profit-taking in oil and certain other commodities,
after the IMF scaled back its growth projections for
the US and Japan, and after the IEA warned that $100
oil is beginning to impact the global economy.
are real risks that a sustained $100-plus price environment
will prove incompatible with the currently expected
pace of economic recovery. The surest remedy for high
prices may ultimately prove to be high prices themselves"
opined the Paris headquartered International Energy
Agency. Meanwhile, Goldman's research notes that made
the rounds among traders on Monday said that the bank
would "temporarily exit" its bets on higher
copper and platinum prices. The Goldman team pointed
to the same threat of high oil prices as potentially
slowing economic growth and cutting near-term demand
for [at least] these two commodities.
fears which had been used as the principal excuse for
the recent marathon runs in certain commodities were
dealt quite a bit of a setback by the IMF/IEA gloomy
findings. In effect, the demand destruction alarms we
first witnessed in mid 2008 were sufficiently loud to
temper the rampant speculation on display up to this
point. As a result of Tuesday's rush for the exits,
the CRB Index fell 1.9 percent while black gold lost
3.3% and came down to near the $106.00 level. Gold was
not immune to the sell-off and also lost the most value
in circa four weeks amid such selling. More on the CRB
and commodity cycles, later in this post.
stabilization efforts resulted in the midweek session
opening on the positive side for the precious and noble
metals' complex. Spot gold rose $5.00 per ounce to open
at $1,458.80 this morning while silver was ahead by
23 cents and started the day at $40.34 the ounce. First-line
support in the yellow and the white metal is currently
pegged at $1,447 and at $39.78 respectively. Platinum
and palladium gained $11 and $10 respectively and were
quoted at $1,782.00 and at $770.00 on the bid-side in
New York. Rhodium remained at $2,300.00 per ounce after
having slipped $30 on Tuesday.
In the background,
crude oil managed a 40-cent gain (to the $106.65 level
per barrel) and the US dollar fell marginally (0.06)
to a quote of $74.80 on the trade-weighted index. Nervousness
and volatility will likely continue to be felt for the
rest of today's session, albeit the economic calendar
is relatively light on impactful data to come save for
the release of the Fed's Beige Book. Thursday will have
a sufficient amount of attention-grabbing statistics
to parse however.
At this juncture,
players are focusing on tonight's watershed speech on
budget issues by US President Obama and on the weekend's
upcoming Washington meeting of the G-20 nations. Mr.
Obama is expected to lay out a course, a timeline, and
specific figures that are related to trimming the federal
deficit of the US. Certain ‘sacred cows' are involved
in the proposed cuts as well; among them, the military
spending (still at the core of the problem percentage-wise)
and certain entitlement programs. The President has
kept most of the details of his presentation under wraps
thus far, irking his GOP opponents. What else is new?
As for the
G-20, the group will be attempting to come to grips
with still-present global imbalances but is not expected
to address currency exchange rates at this time. Markets
expect the production of a finger-pointing list by the
G-20; one that will identify the countries at fault
for placing the global economy at risk via their trade
balances and/or investment flows and domestic deficits.
Thus, Mr. Obama's speech could not come at a better
time. The IMF has also (just yesterday) pointed out
that the US needs to speed things up in the budget deficit-slashing
department, lest it causes the bond markets to lose
faith in the country's ability to tackle the problem.
Mr. Obama has stated that he wishes to halve the US
federal deficit by the end of his first term. In order
to do so, the US needs to trim its shortfall by 5% of
GDP during 2012 and 2013's fiscal years. The IMF did
not single the US out however, and stated that "all
advanced economies must make steady annual progress
in cutting debt burdens."
a moment, do take a look at the chart of the commodity
that "speaks" 1,000 or more words shows us
that the all-time overvaluation in the commodities market
took place in 1980. A recent article in Futures magazine
by Shawn Hackett (a respected commodities broker and
author of the Hackett Money Flow Report) identifies
what is likely "wrong" with this picture as
well, at this time. As the image shows, at the record
overvaluation in 1980 the ten-year average return on
commodities stood at 12.3%. Quite often, the most reliable
measure of over or under-valuation in commodities is
the ten-year average return of same.
such peak of over-valuation occurred in 2008 at just
below the 10.75% level (and then the complex crashed
during the summer of that year). Where are we today?
Well, it turns out that index is presently well beyond
the 11.81% level that it touched back in February of
this year. Mr. Hackett observes that "this suggests
that commodities are currently near the most overvalued
levels in 200 years." The author also notes that
"gravity always wins out in the end by bringing
a particular asset back down to normalcy, no matter
how bullish the fundamentals appear to be at the time."
Mr. Newton would be proud of that restatement of his
famous Law. Today's apple tree is loaded. Any investor
wishing to be fully informed about all aspects of such
markets might do very well to give Mr. Hackett's solid
work a read.