Although the U.S.stock market has generated a healthy glow
thisyear , thecommodity complex appears to be entering into a
growlingbear market . Just consider these stats:
- After a sharp drop on April 15, gold has plunged nearly 20%
since the year began and nearly 30% since hitting an all-time
high of around $1,900 per ounce in the autumn of 2011.
- West Texas crude oil has slipped from $97 per barrel to $87
in just the past two weeks.
- Copper has slid roughly 12% this year and is off roughly 27%
since the summer of 2011 peak.
- If aluminum breaches the 80 cents per pound mark (it's
currently at 82 cents), itwill see its lowest levels since the
summer of 2009.
Unless these commodities quickly stabilize, they will all start
to break keyresistance levels and head even lower. Yet it's unwise
to lump all commodities together, and thefactors affecting one of
them is quite distinct from all others.
The sliding yellow metal
Perhaps the most vulnerable commodity of all is gold, which has no
supply-and-demand mechanisms to help establish afair value . The
price of gold has always been based purely on sentiment, mostly as
a perceivedhedge against eventually ruinousinflation .
Yet an April 10 report by Goldman Sachs has led even the most
avid gold bulls to question their inflation-protecting stance.
Goldman'sanalysts tooknote of the fact that as the recent crisis in
Cyprus unfolded, gold prices barely budged, which stands "in sharp
contrast to the larger USD gold moves observed during the last
quarter of 2011, when fears that Greece would leave the euro area
were at their highest," Goldman's analysts note.
The key conclusion: The notion that gold is a valued hedge in
these complex economic times is no longer applicable. And it's time
for gold to start trading on the fundamental dynamics of supply and
demand. Although Goldman's analysts see gold remaining above $1,400
this year, they expect the yellow metal to move below $1,300 next
year. Their long-term forecast for gold: $1,200 an ounce.
Why that price?
"Inflation expectations remain well anchored, and oureconomists
expect subdued inflationary pressures in coming years," Goldman's
They figure $1,200 an ounce for gold is fair value if inflation
remains tame. And gold investors are now realizing that the longer
it takes for any inflation to appear, the less patience even the
most avid inflation hawks will have to stick with this trade. So
the exodus in gold is a sign that some investors are heading for
the exits before even more do so.
Central banks are still buying gold and have accelerated their
purchases during the past three months. Goldman's analysts say that
trend will continue, but they figure gold would likely move even
lower than their forecast of $1,200 per ounce were it not for the
central banks' purchases. On the other hand, consumer demand for
gold in China and India appears to be slumping, which is why gold
has been hit especially hard in the past few trading sessions.
"Goldinvestments are increasingly looking like a bubble ... and
long-term investors will look to book their profits in the current
market environment," said Mohit Khamboj, president of the
India-based Bombay Bullion Association, in an
interview with the The
The fact that many gold producers, such as
Barrick Gold (NYSE:
, are beset by their own company-specific mining problems right now
just adds pain to gold investors.
What about other commodities?
The simultaneous sell-off in other commodities may be somewhat
coincidental. The price drops in oil, copper, aluminum and other
commodities is more closely tied to global economic demand,
especially from China.
In this column
from late March, I noted that weak economic data in China thus far
in 2013 appears to be driving the commodity sell-off. China's gross
domestic product grew a reported 7.7% in the first quarter, below
the consensus forecast of 8%. And as long as the possibility
remains that the Chineseeconomy will slow yet further in
currentquarters , commodity prices could keep falling.
That's the view of Citigroup's economists, who just lowered
their price forecasts for several commodities. For example, they
see copper sliding to $3.07 per ounce by next year (from a recent
$3.24), which would be the lowest level in nearly three years.
And whereas Citi's economists expected to see aluminum prices
rebound to 99 cents per pound in 2014, they've just revised that
figure to 88 cents.
Still, these are the kinds of commodities you need to keep
tracking, because lower prices counterintuitively set the stage for
the nextbull market in commodities. For example, consider iron
Iron ore surged from $60 per metric ton in the summer of 2008 to
nearly $190 per ton in February 2011, thanks to firming global
demand in places like China and the United States. Trouble is,
iron-ore producers took note of the firming prices and aggressively
boosted their mining activities. It soon became clear that too much
supply was heading to the market, and iron ore prices slumped below
$100 per ton by the summer of 2012.
That led major producers such as
Cliffs Natural Resources (NYSE:
and others to start cutting back on their production plans. As a
result of reduced supply forecasts, iron ore prices have rallied by
roughly 40% since last summer, to around $140 per ton.
We've seen a similar supply-induced relief rally in natural gas
during the past year as well.
Action to Take -->
And that's precisely the dynamic you will see play out with other
commodity producers. Today's pain will bring supply discipline, and
as supply falls to -- or even below -- the levels of demand, then
the stage will be set for the next commodity upturn. We're not
there yet, but it pays to track the production plans of the top
producers of copper, aluminum and other key commodities. Although
analysts are bracing for a prolonged slump, they'll change their
tune as soon as they see a change in production.
Risks to Consider:
Trying to bottom-fish these commodities can be perilous. The
global economy remains unhealthy, and China and the United States
in particular could start to feel the gravitational pull of
weakness in Europe and elsewhere.
-- David Sterman
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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