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TMFAleph1 (94.05)

The Bull 'n Bear on the Breakup of Commodities

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May 24, 2011 – Comments (3) | RELATED TICKERS: JJC , GLD , IAU

The commodities complex is "exploding," that is, the correlation between the different commodities is breaking down/ reverting to pre-crisis levels. There is an interesting piece highlighting this phenomonenon in today's WSJ.

The two commodities that will experience the greatest difference in fortunes during the second half of the year are gold and copper, or those are the first two that come to mind, anyway. With the European sovereign debt crisis rearing its head for the nth time (and it won't be the last, unless European politicians take a serious approach to the problem) and mounting concerns regarding U.S./ Chinese/ global growth, we can probably expect more demand for the yellow metal (gold hit a nominal high in euros yesterday, by the way.) I think the obvious catalyst for the end of the gold bubble is a U.S. interest hike. At the beginning of the year, I thought this might occur as early as the second half of 2011, but now I am starting to wonder whether we will see it in 2012.

Copper, on the other hand, is an industrial commodity, not a quasi-monetary asset. Goldman Sachs just reduced its GDP forecast for China in 2011 and 2012. China is the largest importer of copper in the world, if I recall correctly. Lower growth means lower copper prices and the decline could be brutal if the Chinese copper trick is unwound on a broad scale.

May you live in interesting times, indeed.

Alex Dumortier

   

3 Comments – Post Your Own

#1) On May 24, 2011 at 3:47 PM, cbwang888 (25.84) wrote:

China can still stockpile copper and other commodities even if their growth slow down. Slower growth is still growing. 

I will bet that you will see $6 copper in 2~3 years. 

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#2) On May 24, 2011 at 4:41 PM, TMFAleph1 (94.05) wrote:

I doubt that the copper 'cash-and-carry' trade I described earlier is sustainable and it represents a significant proportion of Chinese copper inventories. 

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#3) On May 25, 2011 at 11:58 AM, JaysRage (93.90) wrote:

Four things affect commodities as measured in dollars.   Demand, supply and relationship in strength demand and supply of the dollar.    Commodities will move in lock step with strength in regards to demand and supply of the dollar.   All boats will float upward as the dollar continues its devaluation. 

I think the obvious catalyst for the end of the gold bubble is a U.S. interest hike. At the beginning of the year, I thought this might occur as early as the second half of 2011, but now I am starting to wonder whether we will see it in 2012.

Now, you're beginning to see the world that I'm seeing.   I thought we'd see a rate hike by now too, and I was wrong.   There's no reason to expect it at this point.    I agree that a rate hike would hurt precious metals, but I just can't see a realistic scenario where we see a rate hike in the next 6 quarters, considering the continued relative weakness of housing (and therefore banking).    I don't see how the Fed can stop their current policies until housing stabilizes.   The problem is.....by the time that happens, the inflation cycle will be irreversable.  

As for the divergence in commodities, you have to look at the individual commodity supplies and demands.   There are some pretty serious supply and demand fluxuations going on in different commodities right now.   

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