A technical break in oil and silver, increased margin requirements by the CME, and a fast exit by speculators have combined to whack the commodities complex by more than $100 billion in a week. The value of the 24 commodities tracked by S&P GSCI index fell almost $90 billion dollars. Add to that the precious metals ETFs fall of another $13 billion dollars, and you have the makings of $100 billion rout.
That the huge drop in market value was correctly forecast by Goldman Sachs Group. Goldman’s commodity analysts now believe “a possible recovery” may be in the works.
Here is Bloomberg:
The combination of slower growth in U.S. service industries and fewer German manufacturing orders helped drive the Standard & Poor’s GSCI Index of 24 commodities down 11 percent in five days, the most since December 2008, and erased all the gains since mid-March. Wheat, zinc and gold rebounded at the end of the week as U.S. payrolls exceeded economists’ forecasts, reducing concern that demand will weaken.
“Given the magnitude of the pullback, it does create an opportunity for more upside potential, particularly in the second half of this year, when fundamentals are expected to tighten,” Jeffrey Currie, the London-based head of commodity research at Goldman, said in a May 6 interview. A month ago, Currie told investors they should be “underweight” in commodities. “In the very near-term, we’d be a little cautious,” he says now.
It is way too early to say the commodity bull market is over, but it bears watching to see how metals and energy trade over the next few weeks.
Given the changes in margin rules from the CME, I would be looking closely at China’s growth for any insight into near term commodity demand.
I am less convinced than Goldie that this is only temporary — but that is because I have yet to find a reliable metric for valuing commodities other than the last price paid. Hence, of all the traded assets out there, Commodities seem to have the strongest adherence to the greater fool theorem.
The rout in the dollar added much to the strength of commodities. The key question for commodity bulls is will the Fed follow QE2 with QE3?
Up until last week, commodities have been a runway train. Trend followers know not to step in front of a locomotive. The future of commodities may be written not so much by the CME or China or ever the weather, but the Federal Reserve.
Goldman Sees Commodity Recovery as Slump Erases $99 Billion
Maria Kolesnikova and Yi Tian
Bloomberg, May 9 2011
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