Gold is continuing to fluctuate in the 1380-1390 area, while oil is rising in line with stock market sentiment. Although equities have run out of steam today, December has been a very good month on the whole, and the weakness of the day doesn`t have a lot of significance even in the context of the week.
Oil, in particular, seems to have found a strong basis justified by the uncertainties surrounding the global supply-demand picture, as well as the political tensions in the Middle East. What we understand from the Israeli`s Stuxnet operation is that they do not see inaction as an option, even though they are prepared to be creative in order to protect their somewhat lukewarm relationship with Washington under the Obama administration from further damage. They have bought some time by delaying t Iran`s nuclear enrichment program through highly creative means, while the sanctions contribute to the slowdown by reducing the regime`s field of maneuver. But none of these is a permanent solution, and sooner or later, barring a regime change, or perhaps a gigantic step forward in the Israeli-Palestinian peace process, the Israelis will have to confront the danger of a fully nuclear Iran, which, in fact we believe that they will refuse to accept and will respond to by resorting to some form of aggression in the end.
Naturally such prospects place a floor under the long-term price movements of the commodity. At the same time movements in the commodity complex are going to be dependent on the short term trends of the USD index for direction, and in that context, risk perceptions, and expectations of QE by the Federal Reserve are of paramount value. Our final assessment is that until the Chinese go bust, commodity prices will continue to move higher, and while the European situation may continue to create a lot of volatility now and then, prices are unlikely to be checked meaningfully as the whole world races to devalue national currencies in a shrinking global market.
The favorable outlook for commodities as an asset class is only slightly dependent on the role of supply-demand dynamics. Commentators like to stress that the tight supply of many different industrial goods and raw material is driving prices higher, but the very demand that is creating the tight supply situation is essentially dependent on the flow of credit from advanced nations, and their large speculators and investors, who are, ironically, the buyers of commodity futures on the notion that rising demand will stress the supply side. The argument seems circular in many ways, and we believe that it is contradictory in essence. The opinions advanced in defense of the multiple bubbles in this sector are lacking in logical basis, and are only being listened to because the opposite case is neither pretty nor constructive for the long-term outlook. The idea that the authorities are building up bubbles of a size which will probably dwarf the subprime bubble once they explode, and is not very pleasant to listen to.
Gold is a commodity as well, and it is difficult it to expect to survive a lasting commodity crash when it does happen. Still, it could survive for a couple of quarters as speculators anticipate the total breakdown of the world`s financial structures, with trust in governments, politics, and trade partnerships rapidly evaporating. One can conceive of a situation in which the worst case scenario materializes and we see gold skyrocketing to extreme levels, but the more moderate, and still severely damaging outcome where a rapid readjustment of imbalances leads to cash squeezes, price controls, imposition of tariffs seems a lot more likelier. In this case, prices would be quickly targeted by international bodies and large owners of the metal in order to undermine trust in the metal, and to boost the profile of central bank issuances. Coupled with meaningful rises in interest rates, this would mean the end of the bull trend for gold, coinciding with a precipitous collapse of the global growth rate. But arguably, even that is less costly and dangerous than the wholesale breakdown of trust on an international basis.
For 2011, though, we suspect the main theme will be the Eurozone where authorities are committed to keeping their heads in the sand as long as an imminent default is not being expected by the markets. With elections, loan repayments, restructurings, and rating downgrades in store for much of the year, stocks and the Euro will have to battle a constant barrage of difficult news from the region if they manage to end the year in the black. That is possible, if only because of the Fed denying freedom of trade to one type of point of view makes it totally unwise to bet on a nominal fall in stock prices for quite a while. We know little about what will happen China or Korea, or the Eurozone, and the ECB`s future course is open to debate. But with the Fed, matters are simpler, and as long as the sovereign credit rating of the U.S. is not being questioned, the present posture is going to be maintained. That, naturally, means that the USD will remain under pressure during any selection of a one year period on the charts...
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