Is Goldman Bearish or Book-Running?

Zurich, Switzerland

Commodity markets are on edge this week after reports that Goldman Sachs has turned short-term bearish on the complex and urged clients to sell its commodity basket, including crude oil.

The benchmark S&P Goldman Sachs Commodity Index (GSCI) fell almost 3% on Tuesday – its largest daily decline thus far in 2011.

Goldman’s cashing out sparked a wholesale sell-off on Tuesday, which in the grand scale of things, does nothing to change the big pictures for most raw materials. If anything, lower prices offer value investors better entry prices for exposures in oil services, the grains and diversified mining.

Whether commodities witness more selling for the remainder of the week is hard to tell. Prices were already heavily over-extended for the complex and some metals, like silver, failed to meaningfully decline.

As for the significance of Goldman Sachs’s commodity exit, I wouldn’t put too much weight on the decision. If prices head low enough, these guys will turn bullish again.

Goldman might be running its own book, similarly to George Soros last year who called gold a “bubble” at Davos, Switzerland, while simultaneously increasing his stakes in GLD, the SPDRs Gold Trust (NYSE:GLD). The Big Boys have a habit of “talking down” their holdings only to boost their exposure once prices come down.

I’m pleased to see a correction unfold, however. Commodity bulls should welcome one.

Silver probably looks the most vulnerable on a short-term basis.

According to Barclays Capital, investors are running hard into SLV, the iShares Silver Trust (NYSE:SLV). Last Thursday, as prices were just south of $40 an ounce, investors increased SLV’s assets by 42 tons to another record of 15,554 tons. That was the single biggest daily inflow since January.

But, like I’ve been arguing since 2003, a correction in silver (or gold) must be viewed as yet another in a series of buying opportunities. A powerful correction, perhaps taking silver prices to around $35 to $30 an ounce, is possible. Too many bulls are riding silver here.

Still, the state of the world’s finances, especially in the West, remains grim. Fiscal deficits won’t be allowed to decline with any substance ahead of the next recession. Indeed, interest rates must remain low, especially in the United States, and that means the Fed will overshoot credit creation and let inflation run.

I remain incredibly constructive on gold and silver primarily because government deficits are increasing, not decreasing. Don’t believe the chatter about austerity. It’s nonsense.

The United States is talking a tough game on deficit reduction but the truth of the matter is another story ahead of election year politics in 2012; I doubt any meaningful cuts will surface. Instead, the markets will eventually force the issue down Treasury’s throat as bond yields eventually surge down the road.

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