Dr. Copper Doesn’t Jive with the Bears
Investors’ love affair with commodities is over. According to data from Barclays Capital, investors yanked almost $7 billion dollars from commodities markets in June. That’s the biggest outflow since the depths of the financial crisis in late 2008.
June marked another bad month for raw materials with the Reuters-CRB Index falling 5.5%. Every segment of the index posted a loss. Some of the biggest losses belonged to the grains complex where corn and wheat suffered double-digit declines.
The heavily energy-weighted S&P Goldman Sachs Commodity Index, or GSCI, tumbled another 4% in June. West Texas crude oil declined 7% last month.
Since May1st, the CRB Index has now declined a cumulative 9% and the GSCI is down 11%.
But the bearish environment now pervading across commodity markets might be overdone. Sentiment has turned from excessively bullish in April to outright bearish in July on fears of another global economic slowdown in the major economies and weak Chinese manufacturing data.
Yet the markets might be poised for a big recovery over the second half because interest rates remain negative adjusted for inflation and the largest central banks are still widely accommodative. Japanese industrial production is also making a comeback after the tragic March disasters in that country.
A deeper decline in capital markets is likely to force the Fed back into the asset purchasing business and might even include the European Central Bank (ECB), which has not launched a QE program. The Japanese have embarked on something approaching QE 25 since the emergence of deflation in the early 1990s.
The bigger picture in commodities, however, doesn’t show the re-emergence of deflation or demand destruction.
Copper, widely regarded as a barometer of global economic activity and coined Dr. Copper by traders because of its forecasting ability, showed a 2.4% advance in June – quite inconsistent with the trend in raw materials. In fact, copper has been flat since May 1st when commodities have tanked. That’s bullish. This suggests the Chinese have re-entered the market and have started to stockpile once again.
Finally, government intervention and massive manipulation of financial data has caused all sorts of confusion in the commodities pits.
This correction has been especially severe because governments are now clearly attacking free markets and doing everything they can to alleviate commodity price inflation.
Over the past two weeks, the United States and other countries have released strategic oil reserves while the USDA shocked the grains markets with a bearish crop report.
The short-term results of these government-induced actions have been widespread declines in the commodity markets. I suspect most of these policies will backfire as the storm passes by this summer. Global rates are still excessively low and long-term consumption trends are here to stay in the absence of a deep recession any time soon. Inflation remains widespread across most businesses – except housing – and will continue to eat away at paper money.
I’m focusing on gold mining stocks, oil equipment services, agriculture-related businesses, including Latin American farmland, and volatility, which is still very cheap. Managed futures, or Commodity Trading Advisors are in the midst of a steep draw-down and should be accumulated at these levels.