April 22, 2013
China And The IMF Are The Excuse For The Commodities Sell-Off, But Investors Are Simply Raising Cash
To Switch Into Equities And Bonds
By Rob Davies
It is quite surprising that the disparate group of raw materials that constitute the commodities market have such a high correlation of price movements.
In theory the demand and supply environments for gold, base metals and oil are hugely different.
But in practice the commonality of trading desks and especially of the ultimate owners means that movements in one market pretty rapidly make themselves felt in the others.
Gold hit the headlines with its 6.8 per cent fall over the week to US$1,400 an ounce and making for a 27 per cent tumble since its peak of US$1,920.
Gold is never consumed, unlike oil, so it has very different economics. Yet oil suffered in the sell off as well and fell below US$100 a barrel. In such an environment base metals were unlikely to escape; and they didn’t.
The LME index fell 3.5 per cent over the week to 3,073 but that masked some much larger volatility.
Tin recorded the largest fall in percentage terms, dropping 7.8 per cent to US$20,990 a tonne. But it was closely followed by copper with a 7.2 per cent decline to US$6,974 a tonne.
Other metals, with weaker fundamentals, fared quite well with aluminium actually gaining 1.7 per cent on the week to US$1,871 a tonne and zinc adding 0.8% to US$1,857 a tonne.
It was almost as if the bad news was already factored into the weaker players and it was only now that the stalwarts were capitulating.
The publicised version for the reason behind these moves was a downbeat revision of the world economy from the IMF.
Its great engineers of analysis had toiled long and hard in the workshops to craft a new forecast. In reality the new number for 2013 of 3.3 per cent world growth is only 0.2 per cent lower than its estimate made in January. Moreover, the figure for 2014 of four per cent is unchanged.
Mind you, it’s worth bearing in mind that its previous chief economist, Ken Rogoff, was shown last week to have made a schoolboy error in an Excel spread sheet.
The data, and its conclusion, were used in his recent book co-authored by Carmen Reinhart “This time is different”. So, like all forecasts, they should be used with caution.
Nonetheless, the week started badly on the basis of real data, when China reported growth of only 7.7 per cent. The consensus had been for eight per cent.
It might be lower than forecast but it is still a figure that western politicians can only dream of.
In reality what happened was that the slowly decaying momentum in favour of commodities as an asset class reached an inflexion point and suddenly it was a trade that everyone just wanted to do; right then.
Equities have gradually been becoming attractive on a fundamental and a momentum basis, and have as a result been gaining ground at the expense of commodities.
On top of that bonds have started to find favour again in recent weeks. To fund this trade there was really only one place investors could go to raise cash in a hurry and catch up with rising fixed income market.
Commodities were the funding source for the switch. The IMF and the Chinese were just the excuse.
Source >>> www.minesite.com
*****
China And The IMF Are The Excuse For The Commodities Sell-Off, But Investors Are Simply Raising Cash
To Switch Into Equities And Bonds
By Rob Davies
It is quite surprising that the disparate group of raw materials that constitute the commodities market have such a high correlation of price movements.
In theory the demand and supply environments for gold, base metals and oil are hugely different.
But in practice the commonality of trading desks and especially of the ultimate owners means that movements in one market pretty rapidly make themselves felt in the others.
Gold hit the headlines with its 6.8 per cent fall over the week to US$1,400 an ounce and making for a 27 per cent tumble since its peak of US$1,920.
Gold is never consumed, unlike oil, so it has very different economics. Yet oil suffered in the sell off as well and fell below US$100 a barrel. In such an environment base metals were unlikely to escape; and they didn’t.
The LME index fell 3.5 per cent over the week to 3,073 but that masked some much larger volatility.
Tin recorded the largest fall in percentage terms, dropping 7.8 per cent to US$20,990 a tonne. But it was closely followed by copper with a 7.2 per cent decline to US$6,974 a tonne.
Other metals, with weaker fundamentals, fared quite well with aluminium actually gaining 1.7 per cent on the week to US$1,871 a tonne and zinc adding 0.8% to US$1,857 a tonne.
It was almost as if the bad news was already factored into the weaker players and it was only now that the stalwarts were capitulating.
The publicised version for the reason behind these moves was a downbeat revision of the world economy from the IMF.
Its great engineers of analysis had toiled long and hard in the workshops to craft a new forecast. In reality the new number for 2013 of 3.3 per cent world growth is only 0.2 per cent lower than its estimate made in January. Moreover, the figure for 2014 of four per cent is unchanged.
Mind you, it’s worth bearing in mind that its previous chief economist, Ken Rogoff, was shown last week to have made a schoolboy error in an Excel spread sheet.
The data, and its conclusion, were used in his recent book co-authored by Carmen Reinhart “This time is different”. So, like all forecasts, they should be used with caution.
Nonetheless, the week started badly on the basis of real data, when China reported growth of only 7.7 per cent. The consensus had been for eight per cent.
It might be lower than forecast but it is still a figure that western politicians can only dream of.
In reality what happened was that the slowly decaying momentum in favour of commodities as an asset class reached an inflexion point and suddenly it was a trade that everyone just wanted to do; right then.
Equities have gradually been becoming attractive on a fundamental and a momentum basis, and have as a result been gaining ground at the expense of commodities.
On top of that bonds have started to find favour again in recent weeks. To fund this trade there was really only one place investors could go to raise cash in a hurry and catch up with rising fixed income market.
Commodities were the funding source for the switch. The IMF and the Chinese were just the excuse.
Source >>> www.minesite.com
*****
