5 October 2008

Commodity Outlook Confused

Coxe began this week's conference call with an advisory that no charts had been sent out (can't ever remember him doing that). The reason was attributed to the ongoing chaos in the markets, rendering charts out of date by the hour. Had the bailout vote gone wrong he thinks we would have had a Black Friday.

Noting how it's been a devastating week for all except those who were massively short, another in a series of somber discussions got underway. The Credit Market is a bigger problem than the stock market. A Ted Spread at 389 means credit is essentially frozen, nothing being done. Fed doing everything it can. Still, liquidity dissapears when there is no solvency. Ted Spread & VIX ranging near all time highs translates into fear like he's never seen. CBs, all around the world, supplying massive amount of liquidity.

How can the dollar be strong under these circumstances? The reason is covering by the massive dollar shorts and the unwinding of leverage by hedge funds. Fear reigns.

Coxe argued that Gold was down because it's a commodity, and the commodities have been trashed. Commodities are leveraged contracts, and as leverage unwinds commodities sell off. All this against the backdrop of global recession. Unable to discern when we'll see a reversal, yet he remains long term bullish on the commodities.

He recommends the Financial Times article about the commodities, and hedge funds deleveraging at incredible rate (reprinted below). Ag stocks are being sold to meet redemptions too, further evidence of the linkages and knock-off effects due to credit market turmoil. Agriculture stocks were crucilal to hedge fund portoflio strategies, and now they're being liquidated.

The system could roll over and collapse, ted spread has been as wide or wider, over sustained periods, as opposed to the “one day wonders” caused by the collapse of Continental Illnois bank and the 1987 stock market crash.

Bastiat had this to say, which corroborates Coxe

"Just got back from early morning sessions at the Resource Conference. Jim Willie gave a 1/2 hour presentation this morning. He wasn't what I expected at all. He was the most pessimistic of the speakers by far. He thinks the US$ will be dropping soon and expects gold and silver to soar at the same time. He claims (I don't know his record) to have an excellent prediction rate so far on economic events. He is total gloom and doom for the US. Jay Taylor, another speaker I like was not so gloomy but admitted that he just does not know what is going to happen now. Long term, he is bullish on gold but says the next 6-12 months to him are up in the air. There was a woman on the panel, Danielle Park, who sounded extremely sensible. She has written a book on economics called Juggling Dynamite. She was fairly gloomy but not nearly as much as Jim Willie - more of a muddle through type.

Most of the speakers agreed that gold's and PM stock malaise at the moment is due to margin calls on funds (mainly hedge) forcing them to dump commodities and stocks regardless of price. The question was,when will this be over?"

Commodities benchmark falls 28% in 3Q

Published: October 3 2008 11:56 Last updated: October 3 2008 20:16

Severe selling pressure this week led to sharp falls in oil and metals prices amid mounting fears that the ongoing turmoil in financial markets will drag the global economy into recession.

Agricultural commodities also fell this week amid concerns that weakness in oil consumption could also affect demand for ethanol and biofuels.

The S&P GSCI commodity index, the most widely followed benchmark, fell 28.6 per cent in the third quarter and surrendered its gains for the year with a drop of almost 5 per cent compared with its January 1 level.

Citigroup estimated that total positions in commodity markets have shrunk by about $100bn since July and said the net long position had collapsed from $58bn in March to $8bn as a result of the dollar's strength and de-risking by investors.

Oil prices fell sharply on Monday when Wall Street plunged in response to the rejection of the bail-out plan in Washington and managed only a fitful recovery as the week brought more evidence of US demand weakness.

Nymex November West Texas Intermediate rose 83 cents to $94.80 a barrel on Friday, down 11.3 per cent this week. It hit a high of $106.91 on Monday and a low of $91.30 on Friday.

ICE November Brent gained 50 cents at $91.06 a barrel after touching a low of $88 on Friday, down 12 per cent for the week.

Gold sank as low as $818.70 a troy ounce on Friday before recovering to $838 in late London trading, up 0.4 per cent on the day.

Investor inflows into gold exchange traded funds reached a new record this week, and sales of US gold coins in September hit the highest levels since December 1999.

Participants at the London Bullion Market's annual conference heard accounts of record interest in gold for “wealth preservation” as the storm in financial markets gathered intensity.

UBS shut most of its global commodities business on Friday, closing its power and gas, agricultural and base metals operations.

The Swiss investment bank will retain its precious metals business, as this is seen as integral to its wealth management operations, and will also continue to run its commodity indexing business.

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