Opportune time for agricultural commodities

Anyone interested in agricultural commodities should check out my latest post on my forex blog. Its particularly pertinent to NZ and Australia. See http://forextraneous.blogspot.com/2007/09/dont-ride-off-nz-economy.html.

Gold breaking out! Confirmed

Friday's trading in NY gave us clear confirmation that the price of gold is just about to rally. The gold price closed at $US743.70/oz, the highest level in 27 years (since Jan 1980). And if you think thats significant consider that inflation over the last 27 years is likely to have discounted the gold price by 60% by the distorted CPI measure , and probably 120% in real terms. You would need to look to see how the money supply has expanded over that time.

The break is convincing in several respects:
1. Gold broke the previous high of $730.30 set on the 8th May'06.

2. The gold price rally was convincing in itself - up $9.75/oz
3. The gold price closed near its daily high
4. The gold price move is supported by strong fundamentals

But if we look at the following chart we can see that the current rally in the gold price is partially due to gold fundamentals (in as much as the gold price is rising in terms of all currencies) and partly due to a weaker USD (in as much as the USD denominated gold price has risen more). Of course what we would like to see is the gold price break out in Euro & Pound terms, as well as Yen and AUD.

A real increase in the gold price in terms of multiple currencies communicates a growing distrust of monetary units. The reason for this distrust is the relative decline in the valu of those currencies. Currencies decline in value in real terms because the amount of currency in circulation is growing faster than the productive capacity of the global economy. You might think this is a signal to buy other tangible or physical assets as well, but actually this is not the case because their prices are already too high. Most asset markets are high priced because in a period of prolonged monetary expansion, those assets become priced (not on the basis of cost + profit margin) but your ability to pay and your belief in the sustainability of those high prices. The consequence is thus, asset prices are too high, and they will only offer gold buying when interest rates have risen to an extent that property holdings have been deleveraged. You might ask what level of deleveraging has to occur. Well that depends on each country's monetary expansion over the last 20 years less the amount of productive capacity added. Those countries like Australia which have huge exposure to metals are more vulnerable, even though they are helped by gold mining capacity.
You might ask 'why gold' since it is an asset? Well the reason is that gold has under-performed as an asset class over the last 5 years compared to other assets. The reason that it has under-performed is because it offers a low return - assuming you lease the metal, and none if you dont. Its this criticism of gold that makes it the most attractive investment, along with other precious metals. But gold is the best at this stage of the cycle because other precious metals will suffer eventually from a 'demand shock' as higher interest rates curtail industrial demand for commodities.
But gold is a financial asset as well, and as such, its possible for companies to leverage themselves into gold, so prices will in times of uncertainty be volatile. Financial intermediaries will be inclined to sell gold to cover other loss-making positions. But gold will recover like no other financial instrument - at least until the market is deleveraged. In times of instability markets tend to over-react.
Over the last 20 years western governments have been competing in a money expansion fest. Rising inflation will undermine that. Governments can conceal inflation, but they can't conceal the financial burden that places on 'real' people, so there will be a backlash. Higher gold prices will raise attention to this fact. Why is gold over $400/oz if not inflation? Afterall it offers bugger all return. The reason is - its real money when fiat paper is not trusted. The other sign of high inflation is wages...and with falling housing prices, reseting interest rates, tight labour markets, we can expect higher rates.

Source of Base Metal Charts

Until about 12 months ago you could download daily price and stocks data for base metals. Sadly the LME has gone commercial and you now have to pay for it through one of their intermediaries. Fortunately Kitco and others offer daily prices and historical charts which effectively does the job for you. I would however argue that the charts are not as accurate as the trading platform charts.

The historical charts can be accessed at:
1. Copper: See www.kitcometals.com/charts/copper_historical.html
2. Zinc: See www.kitcometals.com/charts/zinc_historical.html
3. Nickel: www.kitcometals.com/charts/nickel_historical.html
4. Lead: www.kitcometals.com/charts/lead_historical.html
5. Aluminium: See www.kitcometals.com/charts/aluminum_historical.html
6. Tin: See ???
In the precious metals we have
7. Gold: See www.kitco.com/charts/techcharts_gold.html
8. Silver: See www.kitco.com/charts/techcharts_silver.html
9. Palladium: See www.kitco.com/charts/techcharts_palladium.html
10. Platinum: See www.kitco.com/charts/techcharts_platinum.html
11. Rhodium: See www.kitco.com/charts/historicalrhodium.html

These are the traded metals where there is a high level of price discovery or disclosure. There are of course alot of other where price information is not so transparent because these metals prices are concealed by confidential commercial agreements between producers and end users. The reason for this is that these markets are illiquid. Another problem is that the metals are often sold as ores or metal concentrates with widely variable concentrations, as well as price bonuses (for precious by-products) and penalties (for deleterious contaminants). For this reason its difficult to reach a standard price for these commodities because every refinery has a different pricing policy to achieve competitive advantage. These metals include:
12. Zircon:
13: Niobium:
14. Tantalum: See www.metalprices.com/FreeSite/Charts/tantalite_charts.html?weight=lb (before 2006) and http://metalsplace.com/prices/?a=14&grt=6 since.
15. Molybdenum: See www.adanacmoly.com/adanac_stock.php
16. Manganese: See www.metalprices.com/FreeSite/Charts/mn_ferro_charts.html?weight=lb (before 2006)
17. Cobalt: See ??
18. Magnesium: See http://metalsplace.com/prices/
19. Chrome: See ??
20. Antimony: See ??
21: Bismuth: See ??
22. Tungsten: See http://metalsplace.com/prices/?a=4&grt=5
23. Mercury: See ??
24. Vanadium: See ??
25. Cadmium: see www.asianmetal.com/Metal_News/index_product63_en.asp or http://metalsplace.com/prices/?a=15&grt=6
26. Iron ore: See http://metalsplace.com/prices/

No other metal not listed here is sold as a discrete commodity because they dont occur in isolation. Even some of the commodities above are seldom mined as a discrete commodity. eg. Cobalt is usually a by-product of nickel mining, bismuth is often a by-product of tin mining, antimony is often associated with gold. These metal combinations might simply be liberated by physical crushing, but often they require more expensive chemical separation processes that directly impact on the value of ores, thus making price determination less transparent.

Finally we have the energy-based commodities:
25. Petroleum:
26. Natural Gas:
27. Uranium (yellowcake): See www.uxc.com/review/uxc_g_price.html or in constant dollar terms www.uxc.com/review/uxc_g_hist-price.html
28. Thorium: See http://minerals.usgs.gov/minerals/pubs/metal_prices/

Otherwise you can perform price queries at this site: www.metalprices.com/freesite/historical/price-query.asp. See the US Geological Survey for more more info on commodities: http://minerals.usgs.gov/minerals/pubs/metal_prices and www.crbtrader.com/fund/articles/default.asp. Here are a few other places for metal price charts - http://www.mineralstox.com/.

Gold testing resistance at $US730/oz

The gold price has rallied up to the $US730/oz resistance as expected. This is the last hurdle before we see alot of upside. Given the speed of the rally it would not surprise me to see gold fall back to $694-700/oz level. This was previous resistance and would make a strong support. But by no means is the gold bull over. In fact it would not surprise me if gold rallied on from here. As always - its prudent to look to the charts for guidance at this critical junctures - at least for market entry and exit.

So as we can see from the chart, gold is currently at $733/oz. Thats its previous high set back in May-07. Lets see what the market action shows over Monday and Tuesday. I'm could go higher because it closed the week off a high point. But there is the possibility of a stronger USD if the European Central Bank shows an indication that it wil also lower interest rates. Since central banks are mandated to set policy rates that will sustain economic growth, you can bet that they will making early statements to prevent the Euro from trading too high. So that might be a short term factor driving gold down in the short term. But thats merely a USD-denomination issue - weaker nominal rates and higher 'real' inflation (not the CPI nonsense figures) highlight the fundamental upside for gold.

Gold breaking out!

In recent weeks I have displayed some caution with respect to gold in the short to medium term fearing a sell-off in gold along with other markets, notwithstanding the long term positive outlook for gold. I misread the 'fundamentals' and thus I now find myself fully committing to the market. Whereas yesterday I was only 30% invested, today I am fully invested in gold-copper stocks - with a focus on unhedged producers. The commitment comes with alot of confidence, because not only has the gold price broken out on the upside of a wedge, it has moved up some $12/oz to test a previous high set in Mar'07. The gold price has however not yet broken that resistance, so we will be looking for the market to confirm the break-out with a higher gold price in New York and London later today. If this resistance at $694/oz is convincingly broken, then we are looking at a new target of $720-730/oz in the short term, and far higher in the long term.

The rationale for not yet investing in gold (stocks) was that I perceived a possibility of short term weakness in gold as a result of investment fund selling, as they raced to cover positions, so wanted to wait mostly on the sides until the confirmation came today. Clearly the market believes the US government and Fed are going to support the credit market, or that it will otherwise save itself. Regardless I will support the trend as long as it persists. See A Speculators Dream to see which ASX stocks I'm holding.

Gold - Trend confirmation imminent

We are very close to having our trend confirmed in the gold market. Gold was on the cusp of a trend change on Friday until the Bernacke-Bush duo conspired to sing the same happy song, but look at what they are offering:
1. Bush is offering creditors support if they have a good credit history - to his credit its better targeted support than the central bank flooding the banking system with liquidity
2. Bernacke providing the market with at least the 'hope' of a rate cut. Its my personal opinion that if he was going to offer a rate cut - it would have come 2 weeks ago.

So the choir singing was a surprise - but it comes no surprise that the performance was out of tune. Am I starting to sound like a nervous central banker. Well, just to offer some technical support to this premise:
1. The gold market rallied $8/oz on the news of the Bush-Bernacke support
2. Bush at least seems to be conveying the message that the US government and Fed are on the same ball team by speaking on the same day (Friday)
The bad news for markets:
1. The Dow has not broken resistance - see Market Commentary
2. The gold price has not broken its previous high. Instead it was sold off from $675/oz to $672.

So I think its premature to take a position in the precious metals market or stocks. At this point I see all markets being sold off - but the precious metals market will eventually shine.