Skip to main content
Is There A Commodities' Bubble?
You Bet - Sell Your Gold Already

Below are the main excerpts by Alan Kohler who publishes Eureka Report, a newsletter financially backed by Carnegie, Wylie & Co.There is now five times as much invested with hedge funds as when Long-Term Capital Management went bust in 1998 - a bit more than $US800 billionn. In 1998 the hedge fund losses totalled about 10%; a similar problem in 2006 would cost about $US80 billion. If this was the extent of the problem and it was isolated to hedge funds, it would be rocky but not a wreck. However, if it was associated with other problems, such as a mortgage crisis in the US sparked by a housing crunch, that would be a different matter. Between March 1 and May 11 the price of copper rose 80%, which is extremely silly. It was the largest of a collection of commodity price blow-offs driven by hedge funds and speculative long-only funds panic-buying in anticipation of a big upsurge in investor demand for metals on the back of the growth of exchange trade funds. Gold rose 40%, zinc 75%, nickel 45%, aluminium 38% and tin 20%. The damage caused by a generalised 25% commodity price correction, or more, would depend to some extent on the leverage of those funds caught long, and given the secrecy in which the hedge fund industry generally is shrouded it is impossible to know until the flag goes up. These jumps in price easily hints at excessive speculation but also the rise and rise of ETFs, but even buying for ETFs would generally involve actual listed stocks and not the physical commodity. The danger is if the commodity prices upswing also led investors to pick up related listed stocks. It's worth noting that the Australian market in general, including market leader BHP Billiton, did not really follow the copper rocketing prices past month. Middle-sized miners such as Zinifex, Oxiana, Hardman and Lihir did follow, which is why they fell about 10% per cent yesterday. Anyway, the commodity price bubble has been bearing all the hallmarks of the internet bubble of the late 90s: assets that don't make profits and don't pay dividends doubling and trebling in price because of a "game of pass the parcel to a bigger fool than me". It is the sort of game that must come to an end.

Morgan Stanley's Steve Roach says the commodity price surge is "off the charts" when compared with all those of the past. Over the past four years, The Journal of Commerce industrial gauge (which includes textiles, metals such as steel, copper, aluminum, nickel, zinc, lead, and tin, petroleum products including crude oil, benzene, and ethylene, plus a miscellaneous grouping of hides, plywood, rubber, red oak flooring and tallow) has increased by 53% - a sharper rise than that which occurred in any of the four previous periods of global recovery. "Moreover, as seen in real terms - scaling the JOC by the cumulative increase in the US headline CPI over the same periods - the current surge in commodity prices stands out as even more extreme," Roach says. "The real JOC is up 42% over the past four years - nearly double the 23% average gains that occurred in the two commodity booms of the 1970s and in sharp contrast with the relatively stable trends during the global growth cycles of the 1980s and 1990s."

But commodities are not the only assets that have been experiencing a bubble - the other is US dollar debt, as a result of the unsustainable American consumption binge, supported by the uneconomic purchases of US bonds by foreign central banks, especially in Asia. A gradual, long term decline of the US dollar has been underway since 2002, although for 12 months during 2005 it reversed because of the widening interest rate differential, as the Federal Reserve raised the US Fed funds rate at every meeting. More worrying, China is also tightening monetary policy and this week has allowed its currency to rise above the important eight yuan to the US dollar. It was that event that probably sparked the panic on commodity markets.

Due to the Chinese currency policy, Asian monetary policy has basically been locked into a dollar system. No Asian country wants to lose competitiveness to China, and thus they have been forced to maintain quasi-pegs to the dollar. The official removal of the dollar system means that the Asian dollar-based monetary system is now just about to self-destruct. Asian central banks have racked up unprecedented amounts of dollars, just as Europe and Japan took in excessive amounts of dollars … in the early 70s. A rush for the US dollar door again would be very bearish for Wall Street. The commodities correction, on the other hand, may be just what the resources sector needed.


Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…