Why Commodities are Looking Weak in the Short Run

With the Fed’s excessive pumping of liquidity into the market, you would expect hard assets like gold to continuously rise higher. Nonetheless, gold recently dipped under $1,100, down almost 10% from its peak just a few weeks ago. Turns out, while expectations of inflation should push prices higher, at least in the short run, there are other critical factors — like renewed dollar strength — also at work in the commodities market.

According to The Pragmatic Capitalist:

“With most the commodities priced in USD, the recent strength in the greenback will hurt commodities. Demand may have become more price inelastic than in earlier years, but with the [Commodity Research Bureau] breaking its recent support expect further weakness to come…

“…the lesson from the Japanese experience of the 90’s was to sell the rally when the stimulus was removed.  With the US and China both applying their own versions of the withdrawal method (though we note that Japan is still pumping away as furiously as ever) now is that time…

“…As with many market signals in recent times, the bounce back in the steel price has been unusual as it has not yet been accompanied by supply constraints. In the context of a slowing in new orders, growth this inconsistently looks even weirder. […] The disconnect between price and supply is even stronger in the copper market.  You could reasonably argue that the market is anticipating shortages to come as the new orders are stronger in this metal with only the US looking like turning weaker.”

The Pragmatic Capatalist is making the argument that in the near term commodity prices are set to weaken. However, should overall growth return to the world economy, and especially the emerging China and India markets, this trend will likely around soon enough. To read more visit The Pragmatic Capitalist to learn about where the commodity markets are headed.


Rocky Vega,
The Daily Reckoning

The Daily Reckoning