The month of May began with investors heading for the exit as panic selling was seen across the whole sector. The Reuters Jefferies CRB Index is down 8% in the week with every single commodity that we track having fallen. It also suffered its fifth steepest daily drop on record.
The energy heavy S&P GSCI index has lost even more being down more than11% in the week. It has been a week of mass liquidation which undoubtedly has brought the speculative positions held by money managers down to more manageable levels.
Silver the spark
The combination of near record short dollar and long commodity positions had become so stretched that only a small spark was enough to light the fire. In this case the spark came in the shape of silver.
The combination of near record short dollar and long commodity positions had become so stretched that only a small spark was enough to light the fire. In this case the spark came in the shape of silver.
Silver the star performer lost 2 months worth of gains in just a few trading sessions after CME reacted to the unprecedented high levels of volatility over the last couple of weeks. In just four moves CME hiked the margin for holding silver futures by a total of 84%, thereby forcing investors to put up more cash or get out. The result was the biggest one week loss since 1975.
Despite being just a small market in the overall commodity space, the fascination and attention silver had begun to receive became its own undoing as speculators piled in to be part of what seemed to be an unstoppable move higher. Investors had already started to worry about the overall sustainability of some of the high prices, especially in energy after surprisingly weak economic data in Europe and the U.S. began to indicate demand destruction at a higher speed than expected. Once the selloff in silver began last Monday it became the trigger for other markets to follow suit.
Gold relatively calm
Gold had a relatively good week despite the carnage hitting silver, which resulted in a sharp recovery of the ratio between the two. On Monday 30 ounces of silver bought one ounce of gold but by Friday this had risen to 44 ounces, a 47% recovery in just one week. The interest from emerging market economies to diversify reserves away from the dollar is still ongoing. This week the Mexican central bank announced it had purchased 100 tonnes of gold thereby joining other nations like China, Russia and India. The gold uptrend is intact above 1,365 with near term support at 1,440.
Gold had a relatively good week despite the carnage hitting silver, which resulted in a sharp recovery of the ratio between the two. On Monday 30 ounces of silver bought one ounce of gold but by Friday this had risen to 44 ounces, a 47% recovery in just one week. The interest from emerging market economies to diversify reserves away from the dollar is still ongoing. This week the Mexican central bank announced it had purchased 100 tonnes of gold thereby joining other nations like China, Russia and India. The gold uptrend is intact above 1,365 with near term support at 1,440.
Dollar short liquidation assisting the sell off
On the currency front the week began very supportive for the Euro as the 10 year German government yield traded above the U.S. equivalent for the first time in two years. The interest differential had been moving in a supportive direction for the Euro during the rally that began in January as the European Central Bank chose to hike rates, in order to curtail inflation while the ultra low interest regime in the U.S. looks set to continue for longer. The commodity sell off however removed this focus and once EUR 1.4750 gave way on Thursday dollar buying accelerated.
On the currency front the week began very supportive for the Euro as the 10 year German government yield traded above the U.S. equivalent for the first time in two years. The interest differential had been moving in a supportive direction for the Euro during the rally that began in January as the European Central Bank chose to hike rates, in order to curtail inflation while the ultra low interest regime in the U.S. looks set to continue for longer. The commodity sell off however removed this focus and once EUR 1.4750 gave way on Thursday dollar buying accelerated.
Crude oil selling off just like in May 2010
Brent and WTI crude both suffered big losses this week in a repeat of a similar move on the same time last year. With focus shifting to the risk of reduced demand, investors became wary, also considering the record long positions held by money managers. The 21 dollar loss in just a matter of days equalled the 21 dollar loss during May 2010. Given the speculative position on WTI this time is some 150 million barrels bigger than last year, some investors now worrying that this sell off has further to go.
Brent and WTI crude both suffered big losses this week in a repeat of a similar move on the same time last year. With focus shifting to the risk of reduced demand, investors became wary, also considering the record long positions held by money managers. The 21 dollar loss in just a matter of days equalled the 21 dollar loss during May 2010. Given the speculative position on WTI this time is some 150 million barrels bigger than last year, some investors now worrying that this sell off has further to go.
Strong fundamentals offset by short-term weakness
The fundamental picture however has changed a lot from a year ago and with the global appetite for natural resources remaining robust this should help the market finding support pretty soon. OPEC reiterated satisfaction with oil within a 90 to 100 dollar range which should put a floor under the market. The first major level of support on Brent is the 38.2% retracement of the rally from the 2010 low at 104.55.
The fundamental picture however has changed a lot from a year ago and with the global appetite for natural resources remaining robust this should help the market finding support pretty soon. OPEC reiterated satisfaction with oil within a 90 to 100 dollar range which should put a floor under the market. The first major level of support on Brent is the 38.2% retracement of the rally from the 2010 low at 104.55.
Grain markets supported by adverse weather
The grain sector has been under pressure from the wave of risk aversion by money managers, with slower export demand pointing towards demand destruction after the month long rally. Worries about the new crop, however, should keep the sector supported despite ongoing turmoil in other sectors.
The grain sector has been under pressure from the wave of risk aversion by money managers, with slower export demand pointing towards demand destruction after the month long rally. Worries about the new crop, however, should keep the sector supported despite ongoing turmoil in other sectors.
U.S. farmers have been struggling with too much rain in the north and very dry conditions in the south which has led to the slowest planting progress on record. The coming weeks are becoming very crucial for the outcome of this year’s production and further planting delays will support prices once the long liquidation from money managers has run its cause.
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