In View: Commodities pull back, what's next...?
The recent commodities pullback suggests to some observers the bursting of a "Bubble", but many investment pros I spoke to believe it is a temporary pullback.
A weakening USD and strength in Global demand should underpin commodities' strength, while players looking for diversification in their portfolios also will continue to require commodities as correlations break down, they pros say.
What has happened is a massive commodities slide signaled by a huge-run up in Silver prices. The white metal rose 81% in a 3 month period before putting in a Top on April 29. Since then, it has declined 25%+ as exchanges have raised margins, AKA the money required to buy a contract on speculation.
The rest of the commodities sector has fallen due to several factors, including worries about Global growth and a rise in Crude Oil stocks.
On Thursday, signs of competitive currency devaluation between the US and Europe drove the "Greenback" North against the Euro, which pushed the price of US Dollar denominated commodities South.
Nevertheless, from my POV, the longer-term case for commodities remained intact.
Traders cited the margin requirements as one of 3 factors contributing to Silver's sell down, the others being a 50$ price that may not be supported by fundamentals plus dissipating worries over inflation.
Savvy observers and players, believe that not only will Silver demand continue but it also will be strengthened by a Strong trade in Copper and Aluminumas as Global construction demand grows, They also believe grains will continue to rise, evidenced by food demand that has boosted Global prices to their 2nd highest on record, according to a United Nations report.
The US Fed's move to buy various debt from financial institutions has given the stock market a huge boost that could run out when the central bank concludes its US$600B + Treasury-buying program next month. So we have to wait to see how much pain comes back into the market if any.
Back to Silver: 4 hikes in margin requirements in as many days are being cited for the steep fall in Silver's price. But over a longer time line, experienced traders say the opposite will likely be the case..
After the selling period abates, the rise in margins effectively will have cleared out the smaller players, leaving the trade the domain of the houses with deep pockets who could step in and drive prices higher. Plus traders doubt whether enacting a similar margin squeeze in Crude Oil would help drive down prices too.
Let's not forget the correlation issue and how it has broken down among various asset classes.
Much of the US Fed's intervention in the markets, caused most investments to move in the same direction at the same time. But as expectations change and investors have tried to get ahead of the US Fed's plans, commodities, metals in particular, have broken away and again can serve as an effective portfolio hedge.
Gold and Silver exhibit the most important characteristics that investors prize-low correlation to financial assets like stocks, the pattern was less than 20% correlation in both cases last month, and persistently low measurements in Y 2011. Even with the well-publicized increase in Exchange Traded Fund ownership of these assets, they still do not move the prices in step with stocks. So, in the short-term commodities are likely to remain volatile, and once the current price unwind finishes Silver should have no trouble returning to its former levels after it bottoms in the 30/32 Zone. Savvy big players probably will be cautious until then, and not selling but also not rushing to add positions either.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.