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 Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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