Commodities are taking a break for short term.....By Shan Saeed
The commodities pullback shouldn’t be feared. It should be welcomed. Although FINANCIALIZATION OF COMMODITIES* is happening at this point of time whereby big financial investors are taking positions in the commodities market. Financial investors include Governments[ Central Banks], commercial banks, hedge funds, pension funds, private equity group, sovereign wealth funds, big investors like Jim Rogers, Marc Faber, George Soros, Paulson, Chris Weber, Bill Gross and others....
* Bank of Japan-March 2011 Report
Lets analyze the thing about long-term bull markets. Most people are too impatient to profit from them. Part of the problem is the press/ media is so short-term oriented. They look at things from a day-to-day time frame. They need to be strategic in their approach..
Wall Street isn’t much better. Wall Street executives’ pay is based on quarter-to-quarter and year-to-year performance, so they hardly look further out. I make predictions on the basis of long term outlook for commodities.
However, the fact of the matter is big cycles travel in patterns of 15 years to 20 years. Like commodities in the 1970s or stocks in the 1980s and 1990s. Riding those bull moves is how you make money. By my estimate, the commodity bull market has another 5 years to 10 years left in it. However, overdue for a correction. I feel that the weakness the past few days is the start of such a correction. After 12 May 2011, its an interesting month to focus on, I expect Gold/Silver to consolidate before taking a pullback...
Here are some solid reasons to deliberate upon, why:
• I have stated in the past that the year 2008 for commodities was like 1987 for stocks. A short crash. The 1987 crash was followed by new highs by 1989 and then a 20 percent correction in 1990. The 2008 crash was followed by new highs in 2010. I think 2011 will be like 1990 in that we will see about a 20 percent to 25 percent drop in commodities.
• Emerging Markets are tightening. India, China, Brazil, Vietnam, Thailand, Korea and other nations are willing to admit rising commodity prices are inflationary, unlike the U.S. Federal Reserve, where some officials are in denial about it. Most new demand is coming from emerging markets, so I expect their tightening will hit demand.
• The trades were becoming too one-sided short the dollar and long commodities. Let’s clear some of the speculation out.
• The Fed won’t start QE3 right away. This will cause a dip in commodities. However, I expect by the end of the year or early next year, the Fed will launch QE3 and we will see inflation go up again. There's a balance sheet recession in the US economy. Price inflation can be controlled through monetary deflation according to Nobel Laureate from uni. of Chicago Late Milton Friedman.....
QE2, the $600 billion bond buying program using printed money that the Fed began in November will end June 30. This is important because since the financial crisis began, the stock has only gone up when the Fed is printing money. When the Fed ended its last money printing operation, QE1, on April 1 last year, the stock market began to stumble very quickly in May resulting in the May Flash Crash followed by a bad summer for stocks. The bad summer only ended when Fed Chairman Ben Bernanke announced that he would do a second round of money printing.
Hence, a number of investors who have invested in stocks may begin to pull out ahead of the end of QE2 to avoid the downward turbulence that may follow. Already, there are some downtrend in other investments that have likely benefited from the flood of cash that Fed has put into our economy. In particular, silver seems to be leading the way in this shift. I advised few investors to sell their silver when it hit $47-$48 fearing that it had simply run too high too fast and was ripe for a big pullback.
This pullback has spread to other commodities, such as oil and gold. This trend is also due to the poor economic news lately on the slow growth of the GDP in Q1 — almost a 40 percent reduction in growth from Q4 and steady increases in initial jobless claims. But, it may dovetail right into investors pulling their money out of riskier assets in advance of the end of QE2. When QE2 stops many investors fear that higher risk assets, such as commodities, gold, silver and stocks, will fall.
This would further a trend in the market toward what’s called risk on/risk off movements. This means that when the market fears risk it moves out of ALL risky assets — stocks, gold, commodities — and moves into less risky assets, primarily bonds.
Hence, it is hard to balance a portfolio if all risky assets are moving in the same direction. I think this will change and commodities and gold/silver will de-couple from stocks, but that clearly isn’t going to happen this summer.
So be prepared for turbulence in the higher risk investments leading up to and just after the end of QE2. The big question is when will Ben start the printing presses again i.e QE3. My view is that he will have to at some point, maybe by end of this year but I can’t say exactly when he will decide to do so. And, when he does, it will more likely be in the form of an open ended commitment to “print as needed” rather than a specific amount, such as the $600 billion for QE2. It will be an interesting story to watch unfold going forward... One thing I can be sure of is that the uncertainty surrounding the effect of no more money printing and the uncertainty surrounding when or if it might begin again will produce a lot more volatility in the market during the summer. Sorry, no summer vacation for investors in 2011 or 2012 !!!!!!
All signs point toward a commodity pullback.
GLOBAL FINANCIAL MARKET WARNINGS/ALERT.
I would think that the Commodity Channel Index [CCI], which peaked around 691, will pull back to the 550 area, at which time I would buy commodities strongly in anticipation of the big dollar crisis that should hit in 2013. Dollar and debt of US economy bubble will burst. Dead dollars dont bounce..Inflation and unemployment are drag for the US economy. Its inevitable. Like a train coming at you and you are not going to stop it by standing in its way. You need to remove the coffin now. Its 2013, dollar crisis will hit the global financial markets.
Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before entering or signing or making any strategic financial investment or contract or obligations. All financial transactions carry a RISK.....