The reasons for the decline in the precious metals sector over the last month
October 3, 2006
We know Central Banks aren’t selling as much gold as years past, dehedging has been a very big support to the market the last few years with over 75 million ounces bought back from future hedges, no new hedging of any magnitude has been added to the market, mine production has been flat to declining, investment demand has increased year over year,...So what about the factors affecting the commodity markets that really have nothing directly to do with supply/demand economics?
Three major factors are regularly being used as the reason for the decline in the precious metals sector over the last month, declining oil prices, a commodity bubble bursting (due to hedge fund activity) and the Nov. 7th elections in the US.
1. As far as a commodity bubble bursting, I put more faith in what Jim Rogers is currently saying than anyone else out there. He’s seen the booms and busts in the commodity markets over the last 30 years, and his opinion is worth more than 95% of the other Johnny come lately market analysts out there (present company excluded).
We’ve got prices in all commodities that are leaps and bounds above where they were even two years ago. Year over year, the gold price is still 25% higher today than it was October 3, 2005. Silver prices were $7.35 per ounce this time a year ago. Every time there is a new commodity bull market which happens in a time horizon of every 20-25 years, new highs are established across the board for prices…we’re still plenty far away from new inflation adjusted highs in nearly every commodity, gold and silver especially. Either we’ve just experienced the shortest commodity bull market in history or prices are just shaking out a bit before we march forward again. Don’t give hedge funds that much credit. They’ve got plenty of cash and can move markets temporarily, but they can’t influence macro-economic cycles that are decades in the making.
2. Oil prices have taken an especially hard hit over the last month dropping from $78 to $58 today. I’m a firm believer that the era of cheap oil is over. Not that we’ll run out of oil anytime soon, but we’ll run out of cheap oil soon. OPEC has also gotten quite used to the enormous margins and economic windfall they’ve been enjoying over the last 4 years and want to reassert their power over the markets. Look for a cut to OPEC production to get announced sooner rather than later. They’re going to do what they can to keep oil in the $60-$80 trading range. This will begin to support gold and commodity prices instead of knocking them down.
3. The November elections are a nice distraction, but in reality how much does having a Republican President and Senate and a Democrat House affect day to day commodity prices? In my opinion, its a nice reason for said hedge fund money to use to temporarily push around certain markets, but at the end of the day, the ruling political party in the United States isn’t going to affect mine production, dehedging decisions or Asian investment demand. For every set of “stats” that’s been splashed up on CNBC and in the WSJ the last few weeks about markets doing this or that under Demos or Republicans, there is a corresponding set of “facts” done by another researcher showing the opposite. No political party is going to be able to fix the near to intermediate term pressure the dollar will be under in the next few months.
Fiscal conservatism is now an ideal rather than a practice. There isn’t a politician in the US who will be able to do anything to fix the coming dollar crisis. And that is when gold will not just trade as a commodity, but begin it’s full reassertion as a monetary asset.
It’s tough to think longer term when gold prices are down nearly 3% in one day, but we can’t get caught up watching prices on a day to day basis, we’ve got to think more intermediate and long term in our market. Five years ago, no one thought $300 per ounce was sustainable, then three years ago, everyone called the gold bull dead as we pulled back from $430 to $380. Remember, the gold market had a correction of nearly 50% during the last bull market before setting all time highs just two years later. We’re going to get there and it’s going to be better in the long run that it’s not in a straight line.
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