It's Just a Flesh Wound!

Like the beginning of the sword fight between The Black Night and King Arthur in the classic movie Monty Python and the Holy Grail, commodity bulls were dealt a vicious, but not life-threatening, blow yesterday.

It's about time!

Soaring prices for metals, fuel, and other goods along with hyperbolic increases for many of the associated equities have been quite the distraction lately.

Secure in the underlying fundamentals, long time owners of the stuff have learned to just look away for short periods of time as prices have occasionally fallen sharply since the bull market began six years ago.

But, the urge to pay close attention as prices rise sharply is nearly irresistible.

For many, this has left little time for much else in recent weeks.

So, given that this may go on for a little while, possibly through a good portion of March, there will now be time for other endeavors.

But before leaving this topic, let's take a look at what happened yesterday in the hottest parts of the commodity markets - it was a real bloodbath.

Losing Luster

Gold went down nearly $20 per ounce - from $570 to $550. Don't be surprised if it goes down further, possibly a lot further. On the other hand, don't be surprised if it goes right back up.

This time it's different. Throw out all your Fibonacci retracement levels, McClellan oscillators, and other technical analysis mumbo-jumbo because there is an entire world that is in the process of discovering gold.

Well, some would say, "It's never different". Exactly. What's going on right now isn't really different at all. This re-discovery of hard money has happened over and over the same way many times throughout history. This time, in fact it is exactly the same as it's always been - good money forces out bad.

Anyway, here's yesterday's gold chart.


Yesterday, Alan Greenspan attributed the recent rise in the gold price to terrorism, rather than inflation or some other factor. In retirement, as during his long tenure at head of the Federal Reserve, telling people what they want to hear or, speaking freely in indecipherable language, seems to serve him well.

He took home $120,000 for the one hour speech originating in New York and broadcast via hologram to Tokyo - it is left to the imagination whether it was a floating head or a slumped full-figure.

Hi-Yo Silver

Silver looked about the same as gold. So much for effects of the last week's Cheuvreux gold-rigging report out of France and forward buying for the upcoming silver ETF. The price of the "poor man's gold" went down good and hard and there may be more to come.

Recent first-time buyers are probably wondering what hit them.

It seems to be the classic "shaking out" of the weak hands - after you've been through cycles like this a few times, you learn to resist the temptation to compete against the much bigger and more powerful forces at work and just enjoy the ride, occasionally averting your gaze on days like yesterday.


Hopefully, the frequency and duration of the periods when it's best to "look away" will decrease over time, or loftier prices will make pull-backs easier and easier to take. Since last summer when the bloom came off many of the things that the world had been so optimistic about, there have been fewer and milder corrections.

What happens after the sell-off that started yesterday will go a long way in setting the stage for the rest of the year and beyond. Were the last six months an aberation or a sign of things to come? The smart money is on the latter.

Gold Bugs

The gold bugs index was smacked down hard. From the nosebleed territory north of 340, down nearly eight percent in a single session, this is going to make some recent first-time Newmont buyers a little mad.

But, they'll get over it.


After peaking in the fall of 2003 at almost 260, it took the HUI nearly two years to get back to that level, but once it did, it didn't look back. It would be hard to believe that the recent highs will hold for a similar period of time, given all that is happening in the world's economies today.

Those that are patient and understand the fundamental forces at work will be rewarded - the only hard part is the timing.

The Oil Slick

Yesterday, oil stocks paid the price for some recent irrational exuberance and oil was beaten back down toward $60. Somehow it doesn't seem like oil is going to go quietly back into the fifties this year and the odds of sub-$50 oil seem more and more remote as each week goes by.

One commentator was recently heard to say, "Oil is only $65 today". That says a lot about expectations. A mild winter and gas prices under $3 should make $65 oil a lot less painful to the average consumer, although there is growing speculation about the recent relationship between oil prices and gasoline prices.



With all the problems in Iran, Nigeria, Russia, Venezuela, ant the Middle East and then another hurricane season for the Gulf Coast - whatever price relief there is should be short-lived.

While yesterday's price action for commodities across the board may be disconcerting to many, it is not likely that today's commodity bulls will suffer the same fate as the Black Knight.