Commodities tipped to collapse

[ducati916]

BSD

But would like to note the growth figures (400m people) are not based on population growth they are based on numbers forecast to move to cities to join the developed world.

People who will move from a subsistance lifestyle to buying a TV and Air Conditioner for an apartment.

20 million per annum have been making the shift in China alone, in recent years. Increasing their copper consumption at multiple of before.

Noted.
However, there resides in this analysis a rather dangerous assumption.
This is, that the transition from subsistance to the consumption that you assume

This does not just happen, overnight, or otherwise.
Jobs that pay enough to raise consumption to those levels is required.
This is a function of wealth, measured by PPP

China
GDP - per capita (PPP):
$6,800 (2005 est.)

Net migration rate:
-0.39 migrant(s)/1,000 population (2006 est.)

US
Net migration rate:
3.18 migrant(s)/1,000 population (2006 est.)

GDP - per capita (PPP):
$41,600 (2005 est.)

So, the figures while on the surface are impressive, under the figures, the PPP tells a rather different story, one of still great poverty, building wealth takes time.

China is a growth story.
China does have an impact.
It is just that the impact has been taken to the extremes as a valuation.

Here is an interesting article that goes a little way to backing some of my claims concerning investors being short and consumers being long, as well as the broad US based disbelief in the cycle and the removal of the backwardisation in the copper market

I have read the article, and, it is bullish in its conclusions & implications.
It is only one side of the story.

Speculation, or investment in Commodities was advocated as a rational diversification away from Equity & Bond markets, as the argument went, they were uncorrelated, viz. a low coefficient

Then something went wrong.
The GSCI index shows losses.
Part of the reason is due to the inability to trade a positive roll yield.

The more important reason however resides in the fact that the negative correlation with Equities & Bonds has turned positive.
Commodities in the "90's were pretty neglected by retail investors.
Now they are the hot topic and mainstream via numerous funds.

For example;
Over 5yrs to 2005, the correlation between oil and gold was 0.13It now sits at 0.64

The herd psychology of markets [behavioural finance] explains in part the attraction of retail several years into a bullmarket.
A measure of this speculative excess is the spread between prices of listed commodities and unlisted commodities

It currently sits at an all time record of 60%+

Therefore, although there is a case for commodities, the current climate suggests caution rather than outright plunging.

jog on
d998

 

[rederob]

rederob



The economic theory that I relate, is hardly obscure, I am only utilizing basic supply/demand theory & introducing the Law of Diminishing Returns, which explains the rationale for falling prices.

That you posts contain a vacuum of information, but a plethora of opinion somehow suggests a verisimilitude to the topic under discussion; however, we have been down this road before with your bullish stance on gold.



So forgive me that I shall just dismiss your opinion, as just so much nonsense.

jog on
d998

You are forgiven.
I don't worry too much about the impact of economy theory if the markets are telling a definitive story.
I also am reluctant to count golden chickens before they hatch.
So remind me again in January about the gold price: I regret that my gold equities have only given me an 80% return in the last few years, but i guess we can't win them all!

 

[ducati916]

For those interested, the analysis of PD is now posted here;
http://grantmacdonald.blog.co.nz/

jog on
d998

 

[chops_a_must]

BSD

Noted.
However, there resides in this analysis a rather dangerous assumption.
This is, that the transition from subsistance to the consumption that you assume

This does not just happen, overnight, or otherwise.
Jobs that pay enough to raise consumption to those levels is required.
This is a function of wealth, measured by PPP

So, the figures while on the surface are impressive, under the figures, the PPP tells a rather different story, one of still great poverty, building wealth takes time.

Therefore, although there is a case for commodities, the current climate suggests caution rather than outright plunging.

jog on
d998

I don't know dood. All the town planning stuff I've done seems to say otherwise. I am dead set against you here. Your opinions seem to fly in the face of all the data that I have.

 

[ducati916]

I don't know dood. All the town planning stuff I've done seems to say otherwise. I am dead set against you here. Your opinions seem to fly in the face of all the data that I have.

And the data is.................?
Town planning. Go on, knock me out.

jog on
d998

 

[chops_a_must]

And the data is.................?
Town planning. Go on, knock me out.

jog on
d998

Irrespective of GDP and overall demand, rapid industrialisation creates huge demand pressures on resources. An already industrialised nation like the US will have a relatively low impact on prices, because either way in demand, it is mostly steady in comparison to one that is becoming rapidly modernised.

Take testosterone levels in males. One can have a huge amount of testosterone, but if the levels are steady, then testosterone linked behaviours are limited. Compared to someone who has them swinging all over the place.

The point is, it is not about overall demand, it is about the rate of movement within the demand. Already industrialised nations have relatively low swings, developing nations do not.

China aims to have 50% of all the world's manufacturing capacity by 2020, or 2030, I forget, but regardless, this is going to create massive demand shifts on resources.

 

[ducati916]

chops

So where is the data that supports the gaggle of opinion that suddenly appeared?

The short answer, is that you have none, you have read some experts commentary, and adopted it as fact. So be it. I shall comment on your opinion.

Irrespective of GDP and overall demand, rapid industrialisation creates huge demand pressures on resources.

Incorrect.
If my quantity demanded is backed by $1M
And your quantity demanded is backed by $100
The resultant Demand/Supply curves will look very different.

Therefore the size of GDP is very relevant.
If Madagasca decided to go industrial, how much impact would it have?
I accept that China is large, and growing its GDP, but, China is not yet large enough that it can invalidate demand dynamics of the US & EU.

An already industrialised nation like the US will have a relatively low impact on prices, because either way in demand, it is mostly steady in comparison to one that is becoming rapidly modernised.

Nonsense.
Back to economics 101 for you.

Take testosterone levels in males. One can have a huge amount of testosterone, but if the levels are steady, then testosterone linked behaviours are limited. Compared to someone who has them swinging all over the place.

Firstly, testosterone is subject to a physiological negative feedback loop.
Therefore, only in pathological states, will concentration levels fluctuate, possibly effecting emotional fluctuations.

Supply/Demand dynamics follow very similar negative/positive feedback loops.
Are you suggesting that there is a pathology present in the global markets currently effecting a breakdown, or suspension of these basic economic laws?

The point is, it is not about overall demand, it is about the rate of movement within the demand. Already industrialised nations have relatively low swings, developing nations do not.

No, it is about overall demand.
How that overall demand interacts with overall supply at the various price levels. Developed nations are not static. The Law of Entropy.

China aims to have 50% of all the world's manufacturing capacity by 2020, or 2030, I forget, but regardless, this is going to create massive demand shifts on resources.

Aiming & Achieving, two different concepts.
The figures [already posted] suggest that this is far from a given.

jog on
d998

 

[Kauri]

Wonderfull intellectual argy bargy but, in short, what conclusions can we in Economics 001 draw from it in relation to the threads subject.. "Commodities tipped to collapse"...

 

[chops_a_must]

chops

So where is the data that supports the gaggle of opinion that suddenly appeared?

The short answer, is that you have none, you have read some experts commentary, and adopted it as fact. So be it. I shall comment on your opinion.



Incorrect.
If my quantity demanded is backed by $1M
And your quantity demanded is backed by $100
The resultant Demand/Supply curves will look very different.

Therefore the size of GDP is very relevant.
If Madagasca decided to go industrial, how much impact would it have?
I accept that China is large, and growing its GDP, but, China is not yet large enough that it can invalidate demand dynamics of the US & EU.



Nonsense.
Back to economics 101 for you.



Firstly, testosterone is subject to a physiological negative feedback loop.
Therefore, only in pathological states, will concentration levels fluctuate, possibly effecting emotional fluctuations.

Supply/Demand dynamics follow very similar negative/positive feedback loops.
Are you suggesting that there is a pathology present in the global markets currently effecting a breakdown, or suspension of these basic economic laws?



No, it is about overall demand.
How that overall demand interacts with overall supply at the various price levels. Developed nations are not static. The Law of Entropy.



Aiming & Achieving, two different concepts.
The figures [already posted] suggest that this is far from a given.

jog on
d998

Wonderful straw-man arguments you keep pulling out in this thread. You keep doing that.

 

[ducati916]

Wonderfull intellectual argy bargy but, in short, what conclusions can we in Economics 001 draw from it in relation to the threads subject.. "Commodities tipped to collapse"...

Well I would have thought quite obvious.
If you reject my arguments as irrelevant etc, you will no doubt feel that the bulls are correct, and thus accrue, maintain, or increase exposure to commodities via Futures, Options, Funds, or Equities.

If however you feel the Bear case has some validity, you will decrease, avoid, or accrue short postions to commodities.

Failing either of those options, you may simply wish to partake of the discussion via an analysis and interpretation of the data............... or just vent your opinion.

There is something for everyone.
jog on
d998

 

[chops_a_must]

If however you feel the Bear case has some validity, you will decrease, avoid, or accrue short postions to commodities.

Who would? Had a look at the ZFX share price in the last two days?

 

[ducati916]

Who would? Had a look at the ZFX share price in the last two days?

Here is the chart of ZFX.
You can talk me through your analysis if you choose and I presume the case for the Bulls.

 

[chops_a_must]

Here is the chart of ZFX.
You can talk me through your analysis if you choose and I presume the case for the Bulls.

Ahhh, it's going up.

But seriously, it's just following the zinc price. A weeks worth of losses recovered in two days. Zinc inventories running low, with no viable alternative leads to the price of zinc going up.

I don't think this is a case of bulls, it's just a case of market reality.

 

[CanOz]

ZINC CHART for you guys.

 

[ducati916]

Ahhh, it's going up.

But seriously, it's just following the zinc price. A weeks worth of losses recovered in two days. Zinc inventories running low, with no viable alternative leads to the price of zinc going up.

I don't think this is a case of bulls, it's just a case of market reality.

chops, I have highlighted the relevant section, as it beautifully illustrates a previous point, and that is;

The more important reason however resides in the fact that the negative correlation with Equities & Bonds has turned positive.
Commodities in the "90's were pretty neglected by retail investors.
Now they are the hot topic and mainstream via numerous funds.

Lets examine some further figures;
The US accounted for 19% of world GDP growth since 2001
Asia [China + India + Japan + Aus + NZ + Taiwan + Korea + etc] = 21%

The US is huge.
If the US goes into a slowdown [which currently is the case] or into a recession, the demand for commodities will fall.
There will be excess supply.
Price will fall.

Asia, currently runs a $400 Billion current-account surplus with the US.
If US demand falls, that surplus will shrink, stunting GDP growth in Asia.
Falling GDP, increasing supply = falling demand for commodities = falling price.

Exports account for over 40% of China's GDP.
Falling exports = increased supply = falling price.
China's domestic spending = 42% [this is very small]
Capital spending has been increasing at 10%.
However, much of this spending has been inefficiently allocated, viz. Steel.

jog on
d998

 

[chops_a_must]

The US is huge.
If the US goes into a slowdown [which currently is the case] or into a recession, the demand for commodities will fall.
There will be excess supply.
Price will fall.

Well, why hasn't the price fallen already? Why has corn skyrocketed despite the downturn for instance?

 

[Kauri]

Well I would have thought quite obvious.
If you reject my arguments as irrelevant etc, you will no doubt feel that the bulls are correct, and thus accrue, maintain, or increase exposure to commodities via Futures, Options, Funds, or Equities.

If however you feel the Bear case has some validity, you will decrease, avoid, or accrue short postions to commodities.

Failing either of those options, you may simply wish to partake of the discussion via an analysis and interpretation of the data............... or just vent your opinion.

There is something for everyone.
jog on
d998

Failing any of those options, I simply do not have an opinion. If you read/quote opinions of enough experts you will find compelling reasons that validate almost any future scenario you may come up with. Eventually (time frame??) someone is going to be right, but is being right really so important, apart from bragging rights?
If you look back through the last couple of weeks postings on the Gold thread you will see several bearish calls, yet I posted a live gold trade that returned 2.5R on the long side. Must have been lucky. Gold has lifted about 5% since then and now the calls are bullish!! I still have no opinion on the direction of gold, but am watching for what I would consider a trade, I'm not concerned if it is a long or short, so long as I consider that the odds (not probability ) are with me.
Who put their overalls in Mrs Murphys chowder?

 

[ducati916]

Well, why hasn't the price fallen already? Why has corn skyrocketed despite the downturn for instance?

Let's examine the scenario for corn.
Corn can of course be consumed as an agricultural commodity.
Also, corn & sugar cane can be processed into bio-fuels, [ethanol]
Therefore with increasing financial viability of ethanol as a fuel source due to high oil prices, we have a bullmarket in sugar & corn.

The economic slowdown is in this quarters figures.
You will note that many commodities are off their highs.
What should that tell you?

jog on
d998

 

[ducati916]

Failing any of those options, I simply do not have an opinion. If you read/quote opinions of enough experts you will find compelling reasons that validate almost any future scenario you may come up with. Eventually (time frame??) someone is going to be right, but is being right really so important, apart from bragging rights?
If you look back through the last couple of weeks postings on the Gold thread you will see several bearish calls, yet I posted a live gold trade that returned 2.5R on the long side. Must have been lucky. Gold has lifted about 5% since then and now the calls are bullish!! I still have no opinion on the direction of gold, but am watching for what I would consider a trade, I'm not concerned if it is a long or short, so long as I consider that the odds (not probability ) are with me.
Who put their overalls in Mrs Murphys chowder?

Good grief!
The volatility of gold has been tremendous.
One winning trade to the long side says absolutely nothing about anything.

Odds are derivatives of probability.
Thus total nonsense.

jog on
d998

 

[chops_a_must]

You will note that many commodities are off their highs.
What should that tell you?

jog on
d998

Well, if many commodities are off their highs, logically, some are setting new ones. It cannot be any other way. What should that tell you?