Wikinvest Wire

STOP! Or I'll yell STOP again!

Thursday, March 20, 2008

Boy, analysts and talking heads were sure quick this week to proclaim that the commodities bubble had burst ... again. They said much the same thing back in 2006, but the darndest thing happened - the bubble came back to life.
If only the housing and stock market bubbles could be re-inflated so quickly...

Then again, if the commodities bubble didn't stay burst last time, was it really a bubble?

If so, what are the odds of this one staying burst?

We'll find out soon enough.

The reaction to Tuesday's rate cut by commodity markets - where speculators were said to be throwing in the towel after the Federal Reserve cut short-term rates by just three-quarters of a point rather than a full point - brings to mind what they sometimes say about British police officers.

Not issued firearms, but limited to such items as batons and pepper spray instead, when the bad guy is getting away from them, all they can do is yell:

STOP! Or I'll yell STOP again!

The thing is, when Ben Bernanke said much the same thing on Tuesday, commodity speculators listened to him.

They stopped in their tracks and sold what they had.

When the Fed chief highlighted inflation as a top concern before coming up short of market expectations for the largest rate cut in history (as a proportion of the current interest rate) - the speculators gave up.

They stopped, turned around, and walked back slowly with their hands in the air!

Now, the odds are that the endowment funds at Harvard and Yale were buying on this dip right along with their new buddies at pension fund behemoth CalPERS, but don't tell that to the traders at the NYMEX or to those who bought their first gold coins at $975 and their first wheat futures contract last week.

Plenty of help

Make no mistake about it though, the Fed Chief had lots of help.

We live in a finance-centric world and a bull market in natural resources is anathema to both the mainstream financial media and Wall Street (well, at least until Wall Street firms have their commodity trading departments fully staffed).

On CNBC they were all smiles as gold plunged back below $1,000 and the Dow rose.

This MarketWatch story is probably representative of what many investors and analysts felt after watching equities plunge so far in 2008 while oil and gold soared (hat tip B2B).
A year or two ago, would anyone have dreamed that you'd hear someone say that a commodities bubble had just burst when oil was last trading at $104?

If you read through some of the comments attached to that story, you'll be reminded of what most of the investing community still thinks about the natural resource sector. My favorite was the following observation:
"If commodity prices finally burst, then the money that was being invested in commodities should return to the stock market."
It all seems so simple.

Won't they all be disappointed if this commodities bubble behaves like the last one and doesn't stay burst?

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pft said...

After the PPT meeting on Monday, paulson was quoted as saying the economy was sound, but there were some excesses. Heh-Heh. The excesses are being dealt with.

Anonymous said...

Isnt that an old Robin Williams joke?

Anonymous said...

Great post!

Money is the bubble that doesn't burst. When paper monetary systems die Gold gets a massive premium. So buy Gold on every pullback. The only possible end game is a massively devalued Dollar.

Anonymous said...

I was one of those who bought my first gold coins(GLD) at $975 because I was worried about my cash losing so much value so fast. Now I'm out $600 and feeling stupid for buying at the peak.
I'm going to hold my position and see what happens in the next few weeks.

Anonymous said...

I don't know if you have read the book 'the dollar crisis', the basic premise is that when treasury note yields go to zero, the dollar will finally collapse. The 13 week t-note is trading at .50% yield, early trading at .2% yield, that's about as close to zero as it gets. Seems like the theory might play out. 0% yield will create infinite amounts of money.

Apollo said...

The last time I bought gold, it had a huge pullback. I was so mad for buying at the peak!! It crashed from $450 back to $410!!

Chuck Ponzi said...

forgive me if I don't share your sentiment.

Commodities bubbles are like housing bubbles and stock bubbles. You never know exactly then they're going to burst; and you only know in retrospect that they for sure burst at all.

Too many people here sound like housingheads ala 2005. So sure it's going to go up... even though the economic profit of mining, finding, or pumping is way out of whack. Worse yet, the fundamentals for commodities is deteriorating as we speak. You may all think that inflation is here, but we're feeling the inflation of 2002 in current pricing. The deflation of 2008 hasn't hit home yet.

Bubbles are like crazy people... you never know what they're going to do next.

Tim said...

anon 5:46: Robin Williams sound right - couldn't place it until you mentioned that...
anon 7:01: "I'm going to hold my position and see what happens in the next few weeks"?? The next few weeks?? Are you serious? Do yourself a favor and sign up for a free trial and read this: New to investing in commodities
apollo: I know the feeling...
chuck: "Commodities bubbles are like housing bubbles"?? Someday, but not today - maybe you're watching too much CNBC and reading too much Elliot Wave

little larry sellers said...


If you watch only a few minutes of mainstream financial TV analysis, you know that commodities bubbles are unlike housing or stock bubbles. Just note the open disdain the talking heads have for commodities as opposed to the endless adulation they heap on the other kinds of bubbles you mention.

I don't remember how many straight months of unfavorable housing data appeared before the media would admit even the slightest possibility of a housing bubble. Risks were constantly downplayed and potential buyers were (and still are!) implored to get out there and spend on real estate. Contrast that with their behavior this week when everyone declares the sky is falling on commidities after TWO DAYS of declines! One year ago, could you even imagine a scenario where oil trades at $102 a barrel and gold stands at $920 an ounce, yet everyone is cheering the "obvious" demise of commodities?

The bottom line is that commodities are a haven for investors who think the US dollar, stocks unrelated to "real" assets, and US real estate are poor long term bets. I see no reason to think any of those sectors are remotely healthy. The only way I see commodities bugs being played for fools is if we experience an extreme economic collapse, in which case we're all in deep doo doo regardless of how we choose to invest.

little larry sellers said...

I should add that Bernanke deserves an Academy Award for his performance this week. A mere 75bp cut? What a hawk! That guy is willing to do ANYTHING to fight inflation!

d said...


I love commodities. Yet, I am also long on US Reits and US corporate bonds.

Tim said...

From Bloomberg:

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke
By Pham-Duy Nguyen

March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.
``Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''

Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.

Anonymous said...

I think Pham-Duy Ngyuyen of Bloomberg got it wrong - the only reason commodities would be falling right now is because people think we ARE in a recession and that will substantially decrease the demand for commodities ...

Tim said...

More evidence that the Wall Street Journal has the best financial writers in the U.S. and more reasons why millions of people pay to read what they write:

Red-Hot Commodities Cool As Investors Scurry for Cash
March 21, 2008

The mess in the bond markets, tighter lending standards by brokers and worries about the economy are combining to rein in soaring commodities prices.

Investors with losing trades in credit markets -- mortgage bonds or collateralized debt obligations, for example -- are being required by banks and others to set aside more cash to cover the money they borrowed to make trades, a process called "deleveraging." To raise the cash, some investors and hedge funds have sold some of their commodity winners.

"It's a classic deleveraging trade," says Bill O'Neill, a partner at investment-advisory firm Logic Advisors in Upper Saddle River, N.J. He says the unwinding of winning commodity trades has been playing out for most of this week, especially in the first half of the week.
Analysts point out that some regular consumers of commodities -- jewelry buyers, food companies and factory owners -- have slowed their purchases on the belief that prices have risen too fast. Copper buyers in China, for example, have backed away from purchasing the metal and are waiting for cheaper prices, Mr. O'Neill says.

Others see more price rises ahead. "This is a strong cyclical pullback" amid "a structural rally driven by the rising costs of adding new production capacity," says David Greely, senior energy economist at Goldman Sachs. He agrees that some investors have exited commodity trades to raise cash for other areas.

Pool Shark said...

The gold bull is dead. Those of us who bought early last spring in the low 600's are just shaking in our boots.


Gold hasn't crossed below its 200 dma in over seven years. It would still have to drop below 884.70 to do so.
In overnight Asian trading, spot is back up over 919.

Meanwhile, the Nasdaq is still less than half its level from 8 years ago, and the S&P is over 100 points lower. Over the same period, gold is up over three-fold (evan after this week's drop.

Let's see how well the US dollar holds up after next week's consumer confidence number prints...

Pool Shark said...

One last thing,

Take that CRB chart and flip it upside-down.

Pretend for a minute that it represents a stock you're thinking of going long on.

Do you really believe that little spike at the end is the bottom, and the stock will continue to rally from there? Would you invest your money in that stock?

Greyhair said...

Bubble's bursting my ass. Anyone making this statement needs to define "bubble" first.

Actually, in a short term way that's correct. Any market correction is a shaking out process of speculators and weak hands, a mini-bubble if you will. Not incidentally, commodities have been parabolic lately which is unsustainable. But a correction doesn't mean the fundamentals of a bull market aren't still in force. And in commodities, they are. But like most media these days, the shining new bauble that appears in the next 30 seconds will typically get the headlines.

The other thing. A boom/correction in one sector is not necessarily mutually exclusive to boom/correction in other sectors (though you'd never know it watching CNBC). That's why diversification is a pretty good idea.

fat_tail_rider said...

As I am dazed and confused about what to expect from the debt-crippled U.S. economy (hyperinflation? stagflation? deflation?), I am going by the charts, and right now, short-term, the charts for commodities in general and gold in particular do not look good. As greyhair has pointed out, both ascents have been rather parabolic since August. Their descents are exactly what you would expect after parabolic rises, dwarfing their 2006 corrections in severity and magnitude. I sold JJA and GLD when they cliff-dived through their 50-day MAs this week, and so far I'm not looking back. If I am right, I am back in JJA in the mid-50s and GLD at 80; if I'm wrong I'll catch them when they prove me wrong and blow through their all-time highs. I agree that the talking-head disdain for commodities and the quick, gleeful call that they've collapsed bodes well for another big leg up longer term.

tj & the bear said...


Funny, I just made this same argument over at the Ticker Forum.

The people that believe that the gold bull is over must be the same ones that think the stock market bottom is in. After all, the retreat in oil & PMs was less than the gain in financials & homebuilders, and we know what winners *those* are.

This is just another buying opportunity.

Tim said...

The human element of financial markets is much more interesting than any of the numbers...

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