The Commodities Correction You Should See Coming

The Commodities Correction You Should See Coming

In today’s Money Morning…commodities correcting…another populist government could be on the way…can growth double in two years to keep the economy from stalling?…forecasting when the Fed could panic and trigger a crisis…and more…

Commodities continued their correction in overnight trading. Gold fell 0.5%, and now trades below US$1,200 an ounce. Brent Crude fell 0.3%. Coal, iron ore and aluminium all declined too. Only copper bucked the trend, rising 0.4%.

After such a strong run throughout 2016 and early 2017, such a correction across various commodities is not unexpected. The market needs to pause for breath.

In the case of oil, the simple fact is that too many speculators had placed bets on a rising oil price. Despite the longer term fundamentals looking good for oil, in the short term the market needs to get back into balance.

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Commodities Correction

Keep in mind this has as much to do with ‘financial demand’ as it does with physical demand. For example, Reuters had the following report overnight to explain the drop in the oil price:

OPEC said oil inventories have risen despite a global deal to cut supply and raised its forecast of production in 2017 from outside the group, suggesting complications in an effort to clear a glut and support prices.

In a monthly report, OPEC also said its biggest producer Saudi Arabia increased output in February by 263,000 barrels per day to 10 million bpd, after in January making a larger cut than required by the OPEC accord to ensure strong initial compliance.

When the futures market is already positioned very bullishly, what kind of effect do you think that news will have on prices? It’s not going to make more people buy, is it?

Of course not. Rather, it will force those looking for short term profits to exit their positions, which pushes the price down.

If that news came out when hedge funds and other short term speculators were positioned differently, the price could well have risen.

The key take out is that financial demand influences short term price movements in commodities (or any product with a developed futures or derivatives market). But over the long term good old supply and demand influence the main trend.

Adding to the tone of caution across markets lately is the imminent election in the Netherlands, which could well add another populist government to the European Union. Challenger Geert Wilders, head of the populist Freedom Party, is anti-European Union. If he wins it will likely spook equity markets around the globe, at least for a few days.

I can’t say I follow Dutch politics closely…or at all…so I have no idea what the outcome will be. But Wilders does sound a little nuts even for the liberal Dutch populace, so it might be a stretch for him to get over the line.

Although most did say similar things about Trump…

Regards,
Greg

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Greg Canavan

Greg Canavan

Greg is the Managing Editor for Money Morning. He helps investors preserve their wealth over the long term using a method known as value investing. Lucky for Money Morning readers, he imparts some of this knowledge on them three times a week with editorial spots.
Greg Canavan is a feature Editor at the Money Morning and is the foremost authority for retail investors on value investing in Australia.
He is also the Editor of Crisis & Opportunity. An investment publication designed to help investors profit from companies and stocks that are undervalued on the market. Greg is the former head of Australasian Research for an Australian asset-management group and has appeared on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. He has written articles for The Sydney Morning HeraldThe Australian and www.ninemsn.com.au. Greg’s aim is to help you create a portfolio of stocks based on sound, proven, investing principles. His system for identifying stocks trading beneath their ‘intrinsic’ value combines a big picture understanding of the financial markets with a thorough valuation analysis of individual securities. Greg’s method of investing is not about taking huge risks and rushing into big positions. He investigates highly profitable companies trading at a reduced premium to their net asset value, or ‘equity’ value as he puts it – and passes that research on to his subscribers to incorporate into their financial plan as they see fit. With Greg’s help, you can implement a long-term wealth building strategy into your financial planning, be better prepared for the tough financial challenges ahead and stop making the basic, costly mistakes that most private investors make every time they buy a stock. To find out more Greg’s investing style and his financial worldview take out a free subscription to Money Morning here. And to discover what a company’s profitability reveals about its true value…and more importantly how you can use that knowledge to become a better, smarter investor, take out a 30 day trial to his value investing service Crisis & Opportunity here. Official websites and financial eletters Greg writes for:

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