11 May 2011.

No sooner had we breathlessly reported April’s record highs for gold and silver, at over $1,500 

and close to $50 per troy ounce respectively, than commodities stage a ‘flash crash’, startling 

investors and traders alike. Last week silver slumped to below $35 and even gold lost 3.6%.



11 May 2011.

No sooner had we breathlessly reported April’s record highs for gold and silver, at over $1,500 

and close to $50 per troy ounce respectively, than commodities stage a ‘flash crash’, startling 

investors and traders alike. Last week silver slumped to below $35 and even gold lost 3.6%.



The oil benchmark, Brent Crude, recorded its biggest ever one-day fall, dropping further to

 $105.15 a barrel and other commodities including copper, sugar, cotton and cocoa were

 dragged down in their wake.

 Oil’s sell-off may have been prompted by Thursday’s poor economic data from Europe and the 

US, together with evidence of monetary tightening in emerging economies, hurting speculators 

who had hoped to benefit from rising inflation and a weaker dollar.

Perhaps the economics

 of Osama Bin Laden’s death had also brought with it improved prospects for calm in the Middle East. 

Whatever the reasons, ‘bull’ investors recorded big losses in an unseemly scramble for the exit,

 only for Brent Crude Oil prices to later stage a recovery to over $110 by mid-afternoon on Friday

– credited to ‘bargain hunters’ and the more positive jobs picture emerging from the US.

Some 

commentators view this merely as a ‘correction’ but others are less certain, such as Emma

 Pinnock, energy analyst at Inenco, who expects oil prices to drop back below $100 a barrel:

“

Does this indicate the end of a bull run which has driven the prices of many commodities

to record highs? This volatility matters to all of us, as the momentum created by upward or

downward swings in prices of commodities such as oil or gas, affects others included in index 

funds – including food.

And for the world’s poorest, the price of food represents the difference 

between health and starvation.

 Various reasons are cited for these falls, described by one shattered analyst as “horrendous”.

 Silver was the first commodity to collapse earlier in the week and some blame a steep

 appreciation in silver trading costs, prompting a speculative – and contagious – sell-off among 

other commodities.



However, according to Edward Meir, commodities analyst at broker MF Global in New

York:

Indeed many point to the announcement made the day before by Glencore, 

the world’s biggest commodities trader, of a multibillion-dollar flotation.

For some this marks the 

peak for commodities, in much the same way as the initial public offerings of Goldman Sachs 

and private equity group Blackstone indicated the top of their respective markets.

 Markets could recover rapidly: Although high prices may be denting commodities, farmers,

 miners and oil companies alike still struggle to meet demand.

On the other hand, yet more 

negative economic news, such as lower-than-expected US growth figures for the first quarter,

 could continue to subdue prices. Besides which QE2 is ending soon in the US – with no 

sign [yet] of QE3 – so that less liquidity in the markets may check demand for risky assets such

as commodities. This nervousness is also indicated by bond markets, with the 30-year US

 Treasury yield at its lowest since early December and also explains a flight to the relative safety

 of the dollar and the yen.



However not all commodities are the same. Many traders offer different prospects for different 

commodities, pointing at the unrest in Libya which may continue to impact on oil, while gold

 and silver remain supported by investors willing to buy during the dips.

Ultimately, rampant 

demand from the newly aspirant populations of India, China et al for everything from oil and 

wheat to pork bellies and gold, may support the demand for this planet’s finite resources.

The 

rare earth metals so in demand by the high tech industry were largely unaffected by last week’s

 drama.

‘Rare’ of course indicates the limited nature of supply – perhaps the same term will

 become true of other commodities we currently take for granted. 

If so, speculators will be happy and profit-takers may continue to dictate future ‘corrections’ – if

that is all that is indicated by last week’s dramatics.

However, it offers scant relief for those hard-

pressed families struggling to cope with mounting prices at the petrol pumps and supermarket 

tills.

Alice Briggs

EconomyWatch.com

The post The Value of Commodities Can Go Down As Well As Up… appeared first on Economy Watch.

26 April 2011.

26 April 2011.

The original ‘money’, gold has always been highly valued for its brilliance, malleability and purity. King Croesus is credited with the invention of the first gold coins, which remained a primary currency across the globe right up until the beginning of the 20^th century. The ancient kings succeeding him were also probably responsible for the very first cases of inflation after they began adding lead to gold coins – enhancing the royal money supply but simultaneously reducing the coins’ value. In times of war, pestilence and political instability, gold has been jealously hoarded as protection against the vicissitudes of life.

Not much has changed. Today, gold’s popularity and hence value continues an extended bull run which saw a new record high this month/in April, when spot gold breached $1,500 per troy ounce for the first time. Can the price of this most treasured commodity possibly continue to climb and does owning gold really protect wealth against the ravages of inflation? Perhaps most pertinently for investors, does gold’s long boom presage a decline in value: are we now entering the late stages of a ‘gold bubble’?

Economic commentators are certainly divided about the future direction of gold prices. Some point to the perfect correlation of all the factors likely to increase the precious metal’s desirability: Inflationary threat and currency debasement abetted by massive quantitative easing, widespread economic instability and geopolitical unrest in the oil-rich Middle East and North Africa, together with widespread record-low interest rates which have left savers with few options. Given all these contributory factors we are witnessing a classic reaction to fear and uncertainty – investors buying gold, hoarding gold and waiting for some ‘normalisation’ to appear in market conditions. As Mike McCudden, head of retail derivatives at Interactive Investor confirms: “When there’s any sort of market calamity you often see an uptick in gold as it’s regarded as a safe haven. This makes it an ideal tool for hedging against these events.”

Add to this the growing demand from wealthy consumers in India and China – countries among the most seriously affected by rising inflation, whose increasingly well-off inhabitants consolidate their wealth by accumulating what is, of course, a finite resource. According the World Gold Council, Asian consumers accounted for a full 51% of total jewellery and investment demand in 2010.

Chinese families are now said to be more likely to exchange gifts of gold rather than the traditional red envelopes filled with cash at New Year and demand for gold in India, the world’s biggest buyer of bullion, peaks every September at the beginning of the wedding season. Meanwhile, industrial consumption rises and bullish traders also point to shifts in central bank policy which have resulted in the banks becoming net buyers of gold. Whether this represents pessimism for the dollar’s prospects (edging ever closer to an all-time low against a basket of major currencies) or merely a sensible diversionary tactic by central banks, available supply has become further constrained.

There are many traders who are far less sanguine about gold’s prospects. According to Reuters market analyst Wang Tao, technical analysis alone suggests that gold follows an eight-year cycle: With the surge in gold prices begun by 2004 (the strongest gains following the onset of the credit crunch in 2007) then if the research proves correct, prices should peak in 2012 – Wang Tao expects a high of approximately $2,000 per troy ounce. He is not alone in doubting that gold can continue its inexorable climb: a recent survey of analysts conducted by Reuters predicts slowing demand as inflation risk is mitigated by a return to more normal economic conditions, Notwithstanding sovereign debt issues, dollar weakness and further acquisition by central banks, there are some who believe that once the frenzied acquisition of gold recedes, prices could drop to as low as $1000 per troy ounce by 2015.  

Infographic by Column Five Media

Rising gold prices may partly indicate market fearfulness but does investing in gold and other precious commodities even truly offer efficient protection against inflation? Investors clearly believe that they represent a sensible hedging strategy while low interest rates and increased money supply continue to impact on inflation and currency risk. However, research reveals that throughout history, the price of gold has not correlated especially well with rises in inflation and can decline in value suddenly and dramatically – especially when economic and political uncertainty recedes.

Many investors, both individual and institutional, have had little idea where to invest recently, so have plumped for the safest asset of all: the ultimate currency, the currency that delivers when even the State’s money fails. While investors remain jittery, many will continue to seek security in gold – and India’s wedding season hasn’t even started yet.     

Alice Briggs
Investment Writer
EconomyWatch.com
 

The post Shock and Au: Hedging Against Fear appeared first on Economy Watch.