• Home ::
• Fundamental ::
• Market View ::
• Currency Currents

• Send
• Print
• Add To
• Rss

Currency Currents

Currency Currents

Mon, Mar 31 2008, 12:16 GMT
by Jack Crooks

Black Swan Capital

FX Trading – Commodities trouble lurking?  A visual…

From Barron’s Magazine over the weekend [our emphasis]:

“CHINA, AS EVERYONE KNOWS, IS A BIG FORCE IN THE extraordinary boom in commodities. Its voracious appetite for everything from corn and wheat to copper and oil has helped push up U.S. commodities prices by some 50% over the past 12 months.

“But China is by no means the whole story. Speculators -- including small investors -- are also playing a huge role. Thanks to the proliferation of mutual funds and exchange-traded funds tied to commodities indexes, speculative buying has gone way beyond anything the domestic commodities markets have ever seen. By one estimate, index funds right now account for 40% of all bullish bets on commodities. The speculative juices are even more plentiful -- nearly 60% of bullish positions -- if you count the bets placed by traditional commodity "pools."

“Here's the problem: The speculators' bullishness may be way overdone, in the process lifting prices far above fair value. If the speculators were to follow the commercial players -- the farmers, the food processors, the energy producers and others who trade daily in the physical commodities -- they'd be heading for the exits. For right now, the commercial players are betting on price declines more heavily than ever before, says independent analyst Steve Briese.”

Food commodities were crushed after March 2004 in a nasty shakeout that lasted about a year:

 
[Charts not available in text format]
 

…but gold and crude did okay…

  [Charts not available in text format]
 
But, there were a couple of key differences in March 2004 compared to now. One is that food supplies seem a lot tighter now, and the Fed Funds rate was poised to head sharply higher then, and in fact started climbing in June 2004.  Few anticipate the Fed funds rate to be heading higher anytime soon. Below is a weekly chart of Fed Funds Futures Inverted (we have inverted it to portray interest rates heading higher).
 
[Charts not available in text format]

But caution is required, because maybe commodities are more tightly linked to the broader credit cycle than near-term fluctuations in the Fed Funds rate.  Unlike March 2004, now there is a major scramble for liquidity underway among institutional and increasingly individual investors.  That usually means investors dump otherwise solid investment assets to raise cash.  It can become self-feeding as big, and little boys alike, rush to the exits, dampening existing collateral values, forcing increasing amounts of liquidation, further hampering real economic demand (because of the link between financial asset collateral values and the real world), then justifying more selling based on a decline in real demand.  A virtuous circle turned vicious. 

Be careful out there. 

• Black Swan Currency Currents -- 3/31 PDF

Published on  Mon, Mar 31 2008, 12:18 GMT

Archive

• Currency Currents
  Published On Thu, Jul 3 2008, 15:08 GMT
• Currency Currents
  Published On Wed, Jun 25 2008, 16:23 GMT
• Currency Currents
  Published On Tue, Jun 24 2008, 13:56 GMT
• Currency Currents
  Published On Fri, Jun 20 2008, 16:29 GMT
• Currency Currents
  Published On Wed, Jun 18 2008, 18:12 GMT

[ View All ]

• More Reports from this Author
• More Reports from this Contributor

Black Swan Capital LLC  | 2161 SW Racquet Club Drive Palm City, Florida 34990
http://www.blackswantrading.com | jcrooks@blackswantrading.com