Tag Archives: cad

Commodities crash underway: straight down or choppy?

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Commodities did spectacularly well from winter 08-09 to winter 09-10. Many tripled in price, such as oil, copper and palladium. The world seemed convinced that another great phase of inflation was underway or would start real soon now.

The reality is that demand is anemic and that there has been little or no economic growth. The only exceptions are property bubbles in China, Australia and Canada that are just running on fumes, where America’s was circa 2006. The commodity bounce was purely a technical reaction from an extremely oversold condition, exacerbated by mistaken faith in Keynesian policies deployed worldwide. The rally began to stall out from mid-autumn to this March, and is now starting to roll over in force.

Here’s a 3-year chart of copper, a very liquid and widely followed market. Many believe it is an economic guage, but this is nonsense IMO, since it was trading well under a dollar as the economy was booming a decade ago, and like a lot of other commodities was very expensive in the stagnant 1970s (and right now of course). Prices are driven first and foremost by fads. Why else would you expect it to trade at $3.50 in the middle of a deflantionary depression when stockpiles are huge?

Stockcharts.com

I don’t like to brag, since I get plenty of timing wrong, but back in April I noted the divergence in RSI and MACD right as copper made its top around $3.60.

Another favorite guage of risk appetite is the silver:gold ratio, which has remained stalled for the better part of a year now, and looks set to decline again:

Stockcharts.com

Also check out the palladium:gold ratio, since palladium experienced a major speculative bubble lately which has started to crash very hard:

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Here’s oil, West Texas Intermediate… in all of these commodity charts, note the severity and unrelenting nature of the last drop in 2008. There were few rallies where one could safely get on board for a short sale — you were either short from the top for the ride of your life or just had to watch.

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I’m not expecting a lot of chop in these markets. I’d love a nice rally here to increase short positions, but it’s not the nature of commodities to take their time on the way down. Traders had months to see this trade coming and set up shorts, but for those who don’t over-leverage themselves it is by no means too late to get on board.

By the way, the commodity currencies (Australian, New Zealand, Canadian dollars, Brazilian Real and South African Rand) have also started to fall hard but have a long way to go to correct their rallies from last winter.

Want to see one commodity market that we’re definitely not too late to short? Gold and silver mining stocks (GDX ETF below). The gold bugs have been extremely confident and their ranks have swelled lately, so a deep set-back is much needed in this sector. After all, mining stocks often have a greater correlation with the S&P 500 than with the gold price (which I expect to fall, though not as much as stocks).

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Ironically, I’m part of a group that’s building a huge database and stock screener in this space, called the Mining Almanac. Launching our beta site right at the top of a commodities bubble couldn’t be worse timing, so I’m trying to make lemonade and using it to search not for value stocks (what I designed it for) but the opposite so that I can short them!

For safety, don’t buy gold stocks, which are a financial asset with value contingent upon stock market conditions, tax laws (seen in Australia lately as their leftist government has slapped an extra tax on the mining industry) and myriad operational concerns. Along with plenty of cash and treasury notes, buy gold itself, either stored in your name in a vault oversees or in your personal posession. Gold is money, and in a deflationary depression with undertones of currency crisis, you want the very best.

Euro & Swissie break with the pack

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For most of the last couple of years, the non-dollar, non-yen currencies have moved with a remarkable degree of correlation. Priced in US dollars, over a multi-month time frame (and usually even minute-by-minute) there has been little difference between the Euro, the Canadian dollar, the Australian dollar and the British Pound. The correlations are not perfect, and they break apart from time to time (as when the pound had a relatively crappy summer and fall last year). The last couple of days have been terrible for the Euro (white) and its ever so slightly “harder” twin, the Swiss Franc (purple):

Interactive Brokers

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What to make of this? Well, I have no reason to think that the gap won’t be closed before long. Sentiment on the Euro is so negative that I still think a violent short squeeze is possible, especially if there is continued strength in the equity, commodity and other currency markets.

Another possibility is weakness or sideways behavior in the general risk trade, with the Euro holding a bit firmer than the rest. It is so oversold that something eventually has to give. Of course, as we saw with the dollar from August through November, oversold can become more oversold, but that was a decline of a different nature: a lower slope, with a stair-step pattern. The Euro has basically crashed straight down over the last two months. That pace won’t be sustained for very long without relief rallies like what we’re seeing this week in the other currencies.

As I write, there is some support on of their charts. We’ll see if they bounce or cut through — the latter would be all around bearish and may portend a little panic in stocks, etc.

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Oh — and how about that Euro/Swiss relationship? How do you explain the Swissie’s moves by the Greece situation? The Swiss National Bank won’t be printing anything to bail out Greece, and in fact might be expected to print less, given their talk of intervening to attempt (foolishly and with no lasting effect) to weaken the CHF vs. their biggest trading partners’ script.