Tuesday, August 5, 2008
World commodity markets have entered a sudden free-fall. This information is important enough that I want both subscribers and registered members of the site to be aware of it. Please feel free to distribute this report.
My strong advice is to hold off on pre-purchasing your winter heating oil and not lock in any contracts for natural gas. Ditto for pre-purchases of food, all metals, and gasoline/diesel.
If you were thinking of buying into gold or silver, better prices would seem to lie in the future, although the charts are a little less clear here.
This is all consistent with my advice from the last Martenson Report for subscribers (sent 8/2/08), where I said:
“I have my concerns about commodity prices over the remaining portion of 2008, and even more so for 2009. The reason is that extra supply from mines and newly planted acreage should be coming online right as the recession (depression?) is hitting full force in 2009.”
Here are the charts of the commodity damage:
Below is a chart of heating oil, the price of which is falling rapidly. After the price (the blue line) broke through the 50-day moving average (red line), the price declines have been relentless. Because of this, I am personally waiting to lock in my winter oil. I will keep a close eye on the price of heating oil and alert you if or when I think it is ready to climb back up.
Natural gas. Wow. Just wow. This price decline is staggering enough that I suspect there was some heavily leveraged hedge fund on the wrong side of this trade that has now blown up. Somebody is losing a lot of money and somebody is gaining a lot of money. If it turns out that Goldman Sachs was, again, on the right side of a destroyed hedge fund, I will be ready to call “foul.” At any rate, based on this chart you should not lock into any long-term natural gas prices right now, because what you will be sold is natural gas that was bought by your provider a few months ago.
And here’s crude oil. This chart also speaks of severe weakness that could see oil return to $100/barrel in pretty short order. At that point I’ll want to re-evaluate where it might head next. For now, expect cheaper energy prices in the near future.
And here’s the chart for gold. It’s much less clear what’s going on here, although there is certainly price weakness. Should that weakness continue, my next downside target is $850, where I see strong support. If it gets there, I would be a modest buyer of gold while I evaluated its next probable moves.
The next two charts of corn and wheat speak to enormous cash-flow difficulties for farmers. Since farm debt and land prices are in all-time record territory, lots of farms are going to go broke on these declines. But the outfits most affected by such wild price gyrations will be the grain elevators, who have to use grain futures to hedge their operations. These price declines will translate into huge swings in the margin positions of their futures accounts, and quite a few are going to find their profits entirely eaten up by interest payments on bank loans to cover their margin calls. Many will go bankrupt as a result. Given that the bankrupt grain elevators will get bought out by well-positioned financial and private equity firms, we are witnessing one of the largest transfers ever seen of physical wealth due to a paper crisis.
I am still not quite sure what has happened to commodities, though I suspect that a major hedge fund or two has “blown up.” But it’s going to take awhile for this dust to settle. I speculate that world governments started pushing on these markets to help bring commodity prices down in order to allow them more political room to re-liquefy a stricken world banking system. I worry that the governments have actually triggered a destabilizing price crash that will bring its own issues of insolvency to farmers, grain elevators, energy companies, and pension and hedge funds. I fear that the law of unintended consequences will strike, and that ham-fisted government attempts to create the appearance of stability in the larger markets (by interfering with the commodity markets) will actually create the very thing they fear – a series of cascading cross-defaults within the financial system. We shall see.
What do I mean when I say “governments interfere with the markets?” One form of interference is words. Recently the European Central Bank, in concert with the G7 ministers, has made public statements about the dollar being too weak. Bingo! Next thing you know, the dollar turns around and starts going the other way. Since commodities are priced in dollars, the effect of this is to put downward pressure on the commodities. In the US, Congress held meetings and proposed new rules to reign in the impact of speculators on oil prices. There is nothing quite like the threat of government-enforced rule revisions to change the way people think about and act within targeted markets. I have no specific evidence that the government has been directly selling into the commodity markets, but this would not surprise me in the least, especially if done via a proxy, such as a well-connected Wall Street firm or two.
Which is why, if it turns out that Goldman Sachs is, once again, on the right side of this commodity rout (and we’ll know this by their trading profits), I will be more than suspicious – I will be pretty certain that they had implicit or even explicit Federal backing.
I am not against cheaper heating oil. But I am dead set against official interventions in markets because I don’t trust central planning, especially if done by the current crop of “leaders” in DC, who seem to have neither a sense of the risks and challenges we face nor any plan for the future. Worse, such “band-aid” approaches only serve to mask the underlying issues and can even exacerbate them by creating the illusion that everything is returning to ‘normal,’ thereby nurturing a prompt return to the same imbalances that are the source of our current ills. What we need is to wring out the excess borrowing, lending, and spending that marks the past 25 years and eliminate government-dictated pricing designed to hide the impacts of additional monetary and fiscal excess.