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| 2008-09-02 18:20:00 | |||||||||||||||||||||||
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Commodities may face severe corrections By Jon Nadler The massive commodities sell-off that resumed on the heels of a weakening Gustav on Labor Day accelerated overnight and brought values back to $800 in the case of gold, and to near $105 for black gold. In addition, the now one year-old aggressive and pre-emptive dollar rate-slashing campaign initiated under Mr. Bernanke's watch has apparently been a gamble that is paying of handsomely for the US currency, as opposed to being its final nail in the coffin. While the Fed recognized the signs of the coming slowdown before they became a reality, (but was still seen as behind the curve) the rest of the world was running along seemingly fine (but was doing so, evidently, on little more than inertia). Still, the key force behind much of this reversal of fortune is seen by many to be found in oil's behavior. Mr. "Doom, Gloom, and Boom" Marc Faber has today repeated his previous warning that commodities may face a tough second half. Now, the tables have apparently turned, slowing has emerged in the economies of the dollar's rivals, and its summer rally has had the bears preparing for winter since July. What's falling? Practically everything else: the Pound, the Euro, the Aussie, the Nordics - all victims of local and regional slowing. Let's not talk about Asian currencies...the Korean won fell to a four-year low on the same issues, while the Thai baht melted down on political instability. The exception was the yen, which rose along with its US counterpart - albeit its gains may well be limited as the country lost its second PM in little more than a year. While well of their earlier lows, gold and oil were trading under continuing pressure at the start of the abbreviated week. Bullion opened at $804, down $27 per ounce and although $800 held up to now, traders still expect the presumptive support range of from $775 to $790 to be tested before this phase is over. Nice gift, that could be - for India, as it gears up for its festival period. Players were mindful of a dollar above 78.15 on the index and at 1.45 against the euro, while remaining fixated on the $8 to $10 drop in crude oil following reports that oil installations in the Gulf came through with only minor damage and could resume output within days. A $13 drop from pre-storm highs may be a bit overdone, but try to stand on these railroad tracks if you dare... Silver dropped 59 cents quoted at $13.00 even, but the damage was far more severe in platinum. The noble metal lost $89 to dip to $1374 as Japanese auto sales fell 15 percent last month - the largest such decline since 1998. Palladium sank $12 to $291 per ounce in sympathy. Construction spending and ISM index figures on the way today - otherwise not much in the pipeline, besides oil from the Gulf apparently. Debates continue as to gold remaining in a bull market or not. Australia's The Privateer sees a definite bearish chart formation still defining the market. Our friend Paul Walker of GFMS remains of the opinion that one more run to the upside prior to the end of this year is in the cards. However, even Paul is expressing legitimate concerns about the yellow metal's prospects (pricewise) following such a second peak. Mineweb brings us the details: " Leading gold expert and chief executive of GFMS Paul Walker says the gold price could run for another twelve to eighteen months and exceed $1,000/ounce again, but he believes there is a growing downside risk in a 24-month timeframe. Speaking on the Moneyweb/Mineweb Power Hour radio show, Walker said that after seven years of a gold bull-market run, the gold price was reaching a "mature area". The gold rally started around 2001 with an investment drive into gold that built up over the years, but there are now different signs that the broader economic backdrop is starting to turn a little away from gold. "And there are also signs to suggest there are definitely tensions within the market, and that suggests a growing downside risk probably again in a 24-month timeframe," Walker said. "We are still bullish, but I think one can start...the end-game." Walker said he hadn't expected the gold price to drop from $975/ounce in July to the mid $750s/ounce as he thought the downside was $830 or $840/ounce. There was still good appetite for gold on the price dips, but the question that comes to mind is when does a shift in the expectational element occur and what has driven the market to its current point? Walker said it was important to remember that investment has been the driver behind this; the broader based private investment, high net worth individuals, family offices and the like. That has benignly set into rising expectations in various markets, which in turn created a positive feedback loop that has strengthened over the last six or seven years. "And one has to ask the question of what happens if investors stay away from the market for a period of time, a long period of time, and worse yet, what happens if they turn negative? If you look at the supply-demand balances we need investors just to keep the price at $800 or $900." The selling that occurred in the last month pushed the price down and this was compounded by liquidity draining out of the market. "So you do start to again get a feel for what the downside risks are going forward," said Walker. However, he expects gold to reach $1,000/ounce again before the end of the year based on developments in the macroeconomic environment "where there are still many things that could go wrong". "I have been saying that we are seeing temporary drops in the gold price, albeit lower than I would have anticipated. So $1,000/ounce quite easily." It's only the 'quite easily' part and not the number itself that has us somewhat concerned in Paul's outlook. An event - be it geopolitical and/or financial of the order of magnitude that is required to fulfill the 'easily' (and rapidly we might add) criterion in this equation is -at the present time- not on the radar. Could it take place? Of course it could. Is the bigger trend the one that matters more? Depends on your approach to this game. We are well under the $819 level once again. Had this been Monday the 8th -when the full contingent of players is expected back at their posts- we could have seen a larger downdraft in commodities. Not that this one is puny. It could get uglier as the day wears on - simply watch the $800 level and see if that particular levee is breached, or just overflowing... Jon Nadler is Senior Analyst, Kitco Bullion Dealers Montreal |
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