commodities will weaken

[Anonymous]

Chris Johnston

PW – remember what I wrote about inflation and it’s effect on gold. Notice how the dollar has gone sideways to up during this big drop in gold, yet inflation has gone down. This is more proof of the relationship I have explained to you.

[rseiser]

heavyd and vrudny,
I have not met Soros, but from what he writes I have good impression. At least he is interested in the scheme of things and not just the money. The same for hedge-funds in general. All hedge-fund managers (or even some venture capitalists) I met were always nice people. Originally I thought they must be arrogant and cut-throat, keeping all the secrets to themselves, but not at all. They were all very rational thinkers, and well interested to share their views (since it helps them if other people join the particular trade). I would almost say that some of them are heros, since they foster good economics, taking money from the crooked companies and investing it in the productive ones. What’s better in life than stand up for the right thing and make money too.

[technovelist]

I like gold, but after seeing its high volatility, I am getting more nervous about buying gold. How safe is my money when its value can fluctuate by 20% within a few weeks? That certainly does NOT inspire confidence.

PS, I thought you were waiting impatiently for a big drop in gold so you could buy it cheaper, but now you aren’t buying because there was a big drop?

Gold isn’t for wimps. It is highly manipulated by governments precisely because they want to scare people into sticking with a “safe” asset: namely, their currencies, which they can print at will.

So why buy gold if it is manipulated? For the same reason that governments don’t want you to buy it: they can’t print it. Thus, over the long term it will go up in price in all fiat currencies. The more they manipulate the price lower, the faster it is purchased by strong hands who can’t be scared off. Eventually, there won’t be any more physical gold available to be used in the manipulation, and then the price will go sky-high.

In other words, sudden drops are a gift to the strong buyer. But DON’T USE MARGIN OR ANY OTHER KIND OF DEBT. If you do, you will get killed by these shakeouts. If you don’t, they can’t shake you out.

[powayseller]

I still plan to buy gold, but the volatility makes me question my sanity. How do you think the government is manipulating gold? You think they are releasing more gold from the vaults to bring down the price?

Since gold is linked to inflation, and high liquidity/M3 is causing more inflation, gold should keep rising.

[technovelist]

A number of governments are manipulating gold by selling it from their central bank vaults and by backing up “private” investment bankers who are selling it short in the futures market, which can easily knock out weak longs. However, very time they knock the price down, Far-eastern and Mid-eastern buyers who want physical gold see it as a bargain and step up to buy. Unlike the currency markets, no one can print gold. Thus, they have to come up with physical gold to satisfy the physical buyers, and there is a finite supply of physical gold. At some point, the central banks will stop selling either because they don’t want to let go their final tons or because they are completely out. At that time, the price will soar.

[lewman]

If you fear the volatility of gold, one way to do it is to buy options on gold stocks. This way you can invest with a set amount (a small portion of the amount you are willing to lose), then go away and not have to worry about the ups and downs in between.

[lu]

Here’s a pick.

Disclosure: I don’t own any NEM shares. But I’m thinking about buying some if GLD doesn’t break down to the point where Chris Johnston recommended selling. ($570 was it?) 🙂

http://hipegg.blogspot.com/2006/05/newmont-mining-still-shining.html

http://hipegg.blogspot.com/2006/08/newmont-mining-corp.html

http://hipegg.blogspot.com/2006/09/newmont-mining.html

[lewman]

Lu,

Chris and I had a discussion on this $570 call on his blog. You may want to check it out. http://www.blogger.com/comment.g?blogID=27784316&postID=115832815320072481

I tend to think that it’s closer to a mid 1970s type correction as I believe it is a correction in a secular bull market, rather than a end-of-the-game (like 1980) or a bounce during a secular bear (like 86 and 2000). Whether it’ll turn into a 1975-type 50%+ correction depends largely on inflation. So if you think Ben has at least temporarily tamed the inflation beast then brace yourself for a larger correction. This is one fundamental call that for every person who believes so you can find one that doesn’t, and chances are they both make sense.

[ybc]

Some Commodities Funds Pull Back
As the Run-Up Begins to Lose Energy
By SHEFALI ANAND
September 15, 2006; Page C1

Some of the hottest mutual funds of the past year — ones that invest in commodities like oil and natural gas — are starting to take it on the chin.

In the past month, natural-resources and energy funds as a group have lost 6.7% of their value, according to tracking company Morningstar Inc. That has erased a big chunk of their gains for the year: Overall, they’re up only 2.6% year to date. For comparison, the broad Standard & Poor’s 500-stock index is up 5.6% year to date through Sept. 13.

In the short term, the steep declines in commodities funds is bad news for mutual-fund investors, given that so many people piled into these funds in the past few months, which means they missed much of the run-up. Indeed, many investors are still putting their money into these funds. For instance, the $12.18 billion Pimco CommodityRealReturn Strategy fund gained more than $100 million from the start of the year through Aug. 31. Portfolio manager John Brynjolfsson describes the fund’s growth in the past few years as “astronomical.”

Commodities prices are famously volatile — oil prices can soar on Mideast tensions; gold tumbles when inflation worries ease — so they easily could swing back again. And there are a few relatively bright spots. Funds focusing on gold and precious metals are still up 16% since the start of the year, even though they have fallen back a bit recently.

But other important assets are in sharp reversal. Just yesterday, natural-gas prices fell 10% to their lowest close in two years, on news the Energy Department has bigger-than-expected natural-gas inventories. Overall, prices are down 68% from a peak in December.

That is just one of several reasons why energy-heavy funds have been hit particularly hard. After touching a high of about $77 a barrel in July this year, oil closed at $63.22 yesterday, partly due to high inventories of oil in the U.S.

The price swings hammer home the fact that funds like these are best used as a way to diversify a portfolio, but not as a core holding. The advantage of commodities is that their prices generally don’t move in sync with stock or bond prices — and thus, a modest holding of commodities in a portfolio can stabilize the portfolio’s returns over the long term.

Investors already in these funds shouldn’t panic. However, investors who have held the funds for a few years might take this as an opportunity to trim back those positions if the funds have appreciated significantly since they were purchased.

For people who have sat out the commodities run-up, now might not be an auspicious time to jump in. The best strategy is to put only small amounts of money into funds like these, over an extended period of time, rather than try to guess whether or not the market has peaked or hit bottom.

With the sharp jump in oil prices over the past year or so, “I’d be hesitant to even start initiating that piece now,” says Scott Greenbaum, a fee-only financial adviser based in New York.

Commodities can move in long cycles. For instance, gold prices went into a 20-year bear market after peaking in the 1980s, and picked up only during the past few years. Fears about inflation, terrorism and the possibility of a weakening dollar have been driving its price.

The jury is still out about whether the rise in commodity prices is near its peak, though some economists think so. Earlier this month, Morgan Stanley’s chief economist, Stephen Roach, said that “the mega-run for commodities has run its course.”

Others think the price retreat of the past month or so is a temporary blip. Robert Shearer, portfolio manager for the Merrill Lynch Natural Resources Trust fund, says the current decline in price of oil is one of about five downdrafts since 2005. “We’ve not seen a fundamental change in the supply and demand,” says Mr. Shearer, who is bullish on the long-term prospects of oil. His fund has about 80% of its $418 million in stocks of companies that work in energy-related fields, such as exploring, drilling or refining natural gas or oil.

Natural-resources stock funds are distinctly different from some funds that include the word “commodity” or “real assets” in their name, as these commodity funds don’t buy stocks of companies. Instead, they buy complex financial instruments called “derivatives” to mimic a broad commodity index. For instance, the Pimco fund attempts to track the performance of the Dow Jones-AIG Commodity Total Return Index, which is made up of 19 commodities including oil, gold and some less-snazzy ones like soybeans and live cattle.

While funds like these are less dependent on one particular kind of commodity — making them more diversified — investors should note that some can trigger higher taxes. The Pimco fund, for instance, pays part of its yield to investors in the form of ordinary income, which is charged at an individual’s income-tax rate, which can be higher than other rates.

The fund’s manager, Mr. Brynjolfsson, believes the bull market in commodities is “alive and well,” but points out that a lot depends on the broad economy. “If we were to go into a recession or a slowdown, commodities would likely fall further,” he says.

On the other hand, if inflation were to accelerate, or even worse, the economy were to experience so-called stagflation — a situation with relatively high inflation but stagnant economic growth — commodities would be among the few sectors that would do well, he says. The Pimco fund is down 5.5% year to date and is negative 3.3% for the past 12 months, but it is up about 15% a year for the three years ended Sept. 13, according to Morningstar.

“Hopefully, all commodity investors are investing with a long-term view,” says Mr. Brynjolfsson.

[rseiser]

After reading Jim Rogers’ book Hot Commodities I have a few things to add regarding our discussion about China keeping up commodity prices. He makes two points.
His first one is that during a commodities bull-market most commodities go up simply because their supply/demand imbalances, which take many years to correct. In the 1970s everything went up, even though the economy was slowing. I also want to insert here that many commodities are interconnected, so when oil rises, most commodities that need oil to be produced will of course rise too.
His second point is that China will clearly have a hickup, and a recession will put a dent into consumption and commodities prices (like we discussed before). But the trend will continue, and when some countries recover it will be back to renewed consumption outpacing supply. This would also be a perfect example why not all commodities rise exactly in parallel. Sometimes the energies, industrial metals, precious metals, or agricultural commodities will surge.
We will see in this current correction, if it is true and new commodities emerge as temporary leaders.

[qcomer]

The gold bugs basically love conspiracy theories and their complaints that central banks are keeping gold prices “artificially” low is another crack pot theory. They didn’t complain when speculative hedge fund buying was forcing gold prices to actually “artificially” moving gold prices up through the roof hitting 730, without any fundamentals backing them. There is no consipracy theory but basic fundamentals that Gold had too much speculative money in it that is now leaving and inflation is coming down thus putting fundamental pressure on gold prices. I cannot understand people here who expect housing prices to decline 50-70% and still expect huge inflation in the coming years. Such huge declines will kill economy, kill commodity prices and reduce inflation (price appreciation not money supply) and barring a dollar collapse I don’t see gold going up. I will use gold for diversifying my portfolio though (5%).

As for oil prices, I said so when people were posting $100 oil threads that there is too much speculative money in oil that is going to run away (geo-political situation is ok, a clean hurricane season). I think we are going to run into a transitionary period where oil prices will go down to $55-65 range. If that range is broken then it will go to $40 until the Asian economies can create a domestic consumer maket.

Commodity bulls miss this very importaant point that China/Japanese economies are extremely export dependent right now and it will take few years before they can sustain their growth by domestic consumption. Commodity bulls keep repeating their pet sentence “Its a correction since nothing has changed in supply and demand” yet they know deep down that commodities demand is diminishing because of the economic slowdown expected in the biggest of world economies and the lack of an alternative consumer to replace that demand. I am keeping an eye on Japanese and Asian consumer and their retail prices as I think they will indicate the next time commodities will start going up again.

[rseiser]

I think gold is more of a hedge in case the 50-70% drop in housing doesn’t happen. This kind of drop would be such a disaster that it is likely that the government will print money and try to limit it to a 30% drop. This would boost gold by a very substantial amount. Certainly worth the chances, when compared to the alternatives.

[Anonymous]

The risk of oil prices rising in 2012 is increasing amid the
threat of supply disruptions and shrinking spare capacity in
the Organization of Petroleum Exporting Countries, according
to Goldman Sachs Group Inc.“We continue to see a strong case
for crude oil fundamentals tightening further in 2012,” the
bank said in a research note today. Current oil use is so wide
that it has become the major fuel worldwide.

Current Oil Prices

[scaredyclassic]

Who are these people. And why do comments from five years ago seem dated?

Vermin supreme in 2012!

Love america more!

[Author]

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