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.

>

Source:
Goldman Sees Commodity Recovery as Slump Erases $99 Billion
Maria Kolesnikova and Yi Tian
Bloomberg, May 9 2011
http://noir.bloomberg.com/apps/news?pid=20601109&sid=akZA08gJiUQ4&pos=14

Category: Analysts, Commodities, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “GS: $100 Billion Rout in Commodities “Only Temporary””

  1. macrotrader603 says:

    BR anything is possible. Many commodities are in defineable downtrends here, and oil and silver after such big drops may need to do some work here.

    Like your post said last week, watch copper around 4 bucks and oil around 100 to see how they trade.

  2. PDS says:

    How does this fit with GS’s econ dept lowering their US GDP forecast (again) late last Friday?….commode prices have more to do with changing margin reqmts and QE then anything else right now…economic disinflation reality has been distorted by QE morphine drip!!!

  3. Petey Wheatstraw says:

    Long term, fiat money inflates. Yes, all fiat money is relative, but it all inflates. That’s its reason for being. You can’t conjure commodities out of thin air by fiat. Add to that fundamental disconnect the fact that more money is currently made (actually, it’s reallocated), by manipulation of markets (arbitrage and gambling in futures) than by production, and you have a system where the sloshing back and forth of fiat money from one hot spot to another is more “profitable” than the actual creation of new capital.

    Market volatility is the driver of the economy. Long term, commodities will increase in value if for no other reason than demand for them will outpace supply. No such problem exists with the creation/extraction of new monetary units from nothing.

  4. JerseyCynic says:

    so you guys “bet” on how valuable particular commodities are — or what they are “worth” to people (i.e. traders). Since GS is such a big player here (predicting markets) it’s becoming quite obvious to us non-traders what the next move will be…

  5. wally says:

    That’s how it works today… speculate here, speculate there. Is this game over? Well, time to move on to the next one. You cannot predict that kind of action from fundamentals or past history or anything at all. Maybe some guesses as to human psychology would be as good as anything.
    It’s not a market; it’s a game.

  6. KJ Foehr says:

    “… the huge drop in market value was correctly forecast by Goldman Sachs Group.”

    That Goldman forecast meant, “We have taken huge profits in oil and other commodities and are now short. It is time for everyone else to sell commodities so we can profit again as prices fall.”

    “Goldman’s commodity analysts now believe “a possible recovery” may be in the works.”

    Interpretation: OK, we have covered our shorts and are long again; time for everyone else to buy and run the prices back up.”

    “We are doing God’s work as fast as possible… before they put a stop to it.”

  7. Ted Kavadas says:

    RE: “The rout in the dollar added much to the strength of commodities.”

    I am still very concerned that the U.S. Dollar weakness will reassert itself in a very pronounced fashion. IMHO what we are currently seeing is a “bounce” in the Dollar. There is very little to believe, on an “all things considered” basis, that the downward trends in the Dollar will reverse.

    For those interested in charts, my latest blog post on Dollar technicals shows a very pronounced and established downtrend:

    http://economicgreenfield.blogspot.com/2011/05/us-dollar-decline-may-2011-update.html

  8. macrotrader603 says:

    Guys it doesn’t matter if the game is rigged. It’s the traders job to be on the right side of the trade.

  9. dead hobo says:

    Copper was my ‘convincer’ to sell out last week. It fell below $4 after falling with regularity for several days before that. In all other market declines, copper held fast and that gave me confidence that the dips were only temporary. Copper is bobbing above $4 but has not risen decisively yet. Plus, the metal was in a downward trending range. Of course, silver and oil in free-fall was of significant interest.

    Now, to jump back in or to hang back for a few weeks.

    To the negative, the Fed’s pump ends in a few weeks and the markets fell significantly last year when QE1 ended. Virtually all assets fell at the end of QE1 and virtually all assets started to rise in Sept when QE2 was hinted at. Equity markets are at/close to the end of year forecast levels, which are being adjusted by momentum chasers to somewhat higher levels. If oil returns to $110 and above, gas prices will hurt the economy. Earnings season is nearly over and new dreams will have to be sold to keep momentum going.

    To the positive, copper is rising somewhat. Silver investors are true believers and buying the dip. Ditto with oil, it appears. QE2 is still running and equities are responding, but for how long and to what levels? The economy is improving and markets reflect this. There don’t appear to be a lot of traditional sellers left. HFT runs its own show and people like me are just along for the ride. HFT markets bias upward until liquidity is removed, then they fall far and fast. The odds of a computer driven parabolic high well past the point of reason are good.

    Soft considerations are that this isn’t a competitive sport. Any profits are good, even small ones, but losing most because of stubbornness is stupid. Back in November I had clarity. I don’t have it at this time.

    In or out? Wait for an eventual dip, then consider entry or buy and hope?

  10. Bruman says:

    When analyzing commodities, it’s important to remember that they really are priced by global supply and demand. If you are (as most investors should) valuing investments in terms of real returns, the value of the dollar should not be all that important, except insofar as you need to separate real from nominal price appreciation. But really, you ought to be doing this with every other asset as well.

    One thing that has historically been important is the degree to which the US consumes commodities, and so the dollar strength or weakness essentially dictated how much of a commodity went to the US vs being left over for the rest of the world. The US is still a giant in this respect, but globalization, outsourcing, and the emergence of new manufacturing centers is changing this relationship. For now, the fact that China tries to keep the Yuan pegged to the USD means that the dollar strength/weakness is still important, but if China widens the band or allows the Yuan to appreciate and then float, the game will be markedly different. And it’s probably good to do some research on how that will affect the rules of the game.

  11. AHodge says:

    so i am mostly out.
    not getting back in on a 2 day commodity bounce,
    but maybe you could talk me into being long like you are?
    I like long trend for econ (and commodities) but hard to trade long now when the US slowing a little
    and both US and japanese QE likely ending soon

  12. AHodge says:

    macro.. is right trade wat you got
    look for YOUR bailout i am still long Fannie
    possibly the biggest piece of corporate crap that ever was

  13. KJ Foehr says:

    “Guys it doesn’t matter if the game is rigged. It’s the traders job to be on the right side of the trade.”

    There is much more at stake here than just a few traders being on the wrong side of the trade.

    I understand your point, but I think it does matter, depending on how you define “rigged”. If someone merely talks their book, then fine, but if laws are broken or if there is actual manipulation of prices in a way that is not currently against the law, then new laws need to be made to protect those who are not full-time traders.

    It is madness to allow an entity, or a several like-minded entities acting in concert to artificially raise prices through speculation in futures contracts and thus enrich a few to the detriment of millions and perhaps even put the world economy back into recession. Not to mention the influence such price increases could have over elections and geo-politics.

    There should be position limits on all those not directly involved in oil production or use businesses. The market is there for their benefit, not for the benefit of greedy speculators who have no interest in the actual commodity, but only on profiting from the trading casino.

    I do believe fundamentals are more important than speculation in the long run, and that the weakening global economy indicates falling prices going forward. But I also believe there has been significant speculation or investment, however you want to characterize it, in recent months that has added enough incremental buying in oil (and other stuff) to drive the price up maybe $20 to $30 a barrel over normal supply and demand equilibrium, and that has body slammed the American consumer and, no doubt, TROW consumer as well!

    I think we would be much better off without this kind of a free-market!

  14. wally says:

    “When analyzing commodities, it’s important to remember that they really are priced by global supply and demand. ”

    Yes… but. The long term price is the price of extraction or production plus a small profit. (Unless a monopoly or cartel can form to alter that). That means that the non-producer money to be made in commodities – unless you are in the cartel- is only from alterations in the true long term value. Bubbles and busts, in other words.

  15. JerseyCynic says:

    http://www.dailymail.co.uk/news/worldnews/article-1286464/US-discovers-natural-desposits-gold-iron-copper-lithium-Afghanistan.html

    at least “we” found SOMETHING in Afghanistan…

    ~~~

    BR: Why do you think we were looking for something? That was Iraq.
    Afghinastan was where the 9/11 attacks originated from — the Taliban was harboring Al-Quaeda, whow ere behind 9/11.

    Too many wars for you to keep straight!

  16. DeDude says:

    We certainly got a demonstration of how fast the speculators can exit when the dip begins. No wonder the margin requirements were increased. Question is whether they are still to low. I guess we will see about that next time.

  17. mbelardes says:

    C’mon BR, I agree with your “last price paid” valuation when it comes to gold but many commodity values are easier to value than stocks based on supply and demand. Where shortages develope, prices tend to rise. So I agree that there is no DCF valuation model, but there are plenty of ways to go beyond mere speculation when asking “what will this crop fetch in a year?”

    Not that it’s easy.

  18. hwwesq says:

    “correctly forecast by Goldman Sachs Group”?????

    Here’s how it’s done: You “forecast” that people will suddenly flee a movie theater. Then you run in and scream “Fire! Fire! Run for your lives!!”

    Bingo! Your “forecast” is correct.

    Before the silver “correction”, for days every Wall Street Journal site posted article after article with the headline “Silver bubble! Prices will collapse!” Major “analysts” screamed “Silver bubble! Silver bubble!” and “Now is the time to sell!”

    Then the BigShorts sold massively in the Asian markets to start the panic.

    “Correct forecasts” are easy when the Pimp Machine is paid to cause panic.

  19. “We are doing God’s work as fast as possible… before they put a stop to it.”

    ….or before He does!

    Guys it doesn’t matter if the game is rigged. It’s the traders job to be on the right side of the trade.

    You better hope the mob with the pitchforks doesn’t stick you if they show up then. They tend to be non-discriminating when they are aroused to wrath

    It is madness to allow an entity, or a several like-minded entities acting in concert to artificially raise prices through speculation in futures contracts and thus enrich a few to the detriment of millions and perhaps even put the world economy back into recession. Not to mention the influence such price increases could have over elections and geo-politics.

    It is effectively another tax on production and when it is only controlled by a few people for the benefit of a few with little to no competition it is a cabal

  20. JerseyCynic says:

    YES BR — too much everything to keep straight!

    my “PhD in Googling” has DEFINITELY rendered me stooopid

    http://www.thenewatlantis.com/publications/is-stupid-making-us-google

    (first it was Afghanistan for OBL then it was Iraq for WMD….right?)

    A LOT of HOT commodities over there, I guess

    now where’s my war flow chart…

  21. socaljoe says:

    Short term is a random walk.

    Long term the trend is up.

    Buy the dip… take profit on strength.

    It’s worked for a decade and will continue to work until we get a new global monetary system which does not permit unrestrained lending and printing of fiat money.

  22. market_disciple says:

    Amen to your analysis on commodities, BR. In the meantime, to me the price action on commodity complex is still unconstructive to place a large bet like what Goldman says. Grains have shown signs of topping out already. Copper too. Precious metals (Gold, silver, and platinum) price actions are still unconstructive, but I couldn’t resist to play the bounce on silver late last week thinking it would probably retest $40 before revealing where precious metal prices are going next.

    Regardless of what’s going on with commodities, equities look pretty resilient and could still go higher regardless of the direction of USD. The commodity price correction last week was actually good news for equities in general (Lower cost translates to higher profit margin). That should give a surprise upside on equities until QE2 liquidity effect wears off.

  23. derekce says:

    I’m convinced there will be a QE3. Not right away of course, after things stall a bit and after Goldie and Gross are signaled through back channels, we’ll get our QE3.

  24. philipat says:

    Goldie is long commodities. Period.