Silver™

First bonds and now commodities...




Commodities, the worst performer among five asset classes in the first quarter, will continue to “struggle” as the dollar strengthens and China seeks to restrain growth, according to Deutsche Bank AG.

The CHART OF THE DAY shows the S&P GSCI Total Return Index of commodities falling 0.9 percent. A Barclays Capital index gauging total returns on dollar-denominated corporate bonds dropped 0.3 percent and the Deutsche Bank Currency Returns Index fell 0.1 percent. The Bloomberg/EFFAS index of U.S. debt with a maturity greater than one year rose 1.1 percent and the MSCI World Index of equities added 2.7 percent.

“The performance of commodities could be considered particularly disappointing since global investors selected this asset class as the most likely to post the best returns in 2010,” Michael Lewis, head of commodities research at Deutsche Bank in London, said in a report. “We expect the complex will continue to struggle heading into the second quarter.”

Commodity returns have been sapped by futures markets mostly being in contango, with near-term contracts trading at a discount to those maturing at later dates. Investors in index- linked funds wanting to maintain their positions pay a premium as contracts expire. That may ease as concerns about immediate supply worsen and markets flip into backwardation, paying investors a premium as they roll contracts.

China, the world’s largest consumer of everything from copper to iron ore, has lifted banks’ reserve requirements this year amid concern that asset bubbles are forming. A stronger dollar increases the cost of commodities denominated in the currency for those holding other monies.

http://www.bloomberg.com/apps/news?p...BLtJaQ0&pos=15

LaCostaRacer

Yes if you compare the 1/1/10 price of your favorite commodity to today's price, it will probably be less. However, look how commodities have moved from the lows in February to now.

I would hardly classify commodities as being weak with that look. Both oil and Silver are > 20% off the February lows while the SP500 is up 10.5%. In fact, these commodities did this performance despite a strengthening dollar using the Dollar Index as my data point. The Dollar index ($USD at stockcharts = 80.71) is actually going down now from its high of 82.24.

Also, what's going to happen when the Yuan strengthens against the Dollar? Prices will rise in the U.S. and commodities will rise in price with all the other Chinese goods as well.

I still see commodities being a great buying opportunity now that they are cheaper because of the strength in the dollar. I would not count on the dollar remaining strong though- it's only strong because the Euro is weak at the moment. Once Greece is done with their budget woes the U.S. will get scrutinized and the Dollar will get knocked out of its elevated status. If a dumb American like me can see this, I think our foreign lenders will too.

Moog-Type-S

The only way to get out of this MOUNTAIN of debt we have before us is to make the debt "cheaper". The dollar will have to fall lower. Inflation is the only way out.

It's coming sooner or later.

Commodities will rise.

Silver™

They were saying the same thing about Japan a decade ago...

Silver™

Commodities funds have been pitched as a smart addition to diversified portfolios. But the jury's still out on their benefits for the long term.

Investors who had hoped commodities would ease the sting in periods of falling stock prices got a rude surprise in 2008: Just when they needed diversification the most, commodity indexes mirrored the decline in stock indexes.

And even when commodity prices rise, market technicalities sometimes prevent commodities-linked funds from fully capturing the gains. Over the 12 months through March, the price of oil, as measured by the most commonly quoted futures, climbed 69%—but the iPath S&P GSCI Crude Oil Total Return Index exchange-traded note gained 41%.

What this says about the value of commodities as a diversification tool remains a matter of debate among analysts. But for investors who bought into the idea that commodities-linked exchange-traded funds and notes would boost returns and reduce risk in their portfolios over the long term, one thing is clear: These products don't always live up to their promise.

http://online.wsj.com/article/SB1000...942345100.html

Moog-Type-S

You don't think the US will have to inflate its way out of debt?

LaCostaRacer

Japan and US are completely different in their problems so it's a stretch to think that the U.S. won't have inflation because Japan does not.

Japan still produces lots of exports despite being trumped by China of late. Japan is not in as much debt as the U.S is and its citizens actually save money unlike most U.S. citizens that spend more than they earn. The other difference is population growth and average age of citizen where Japan population is decreasing and getting older while U.S. population is still increasing. As Moog is alluding, the U.S. WILL have significant inflation in less than 4 years while Japan will not.

Commodities are a good way of storing value now. I'm not as excited about stocks these days because stocks seem very pricey compared to gold (.e.g. Dow/Gold is around 9.6 and I think the ratio will be dropping to 5 which is a historic average) So you can pick your own way of storing value but at the moment Gold/Silver/Oil are making a lot of sense. Silver and Oil are outperforming the SP500 and that's what I always strive to do.

Silver™

Not when they use the same medicine, spending their way out of an economic funk.



And the US still exports nearly 2x as much as Japan. And as of late Japan is starting to run a trade deficit.






Public debt as a % of GDP in Japan = 192%
Public debt as a % of GDP in the United States = 52%

https://www.cia.gov/library/publicat.../2186rank.html



Well the US savings rates are back to some degree of normalcy, Japan has such high rates due to the cultural differences, but more importantly it is driven by the fact that they have been in or near deflation.



Not sure why the comparatively small change in population growth between now and 2014 will have such a significant impact. Perhaps I have missed something



While I think that stocks are for the most part overvalued, I think we will still see a run up over the next couple years. There is still a lot of money out there chasing returns and if bonds don't perform then stocks are the next logical avenue.

And I agree that commodities are a safe bet in the long run, they just won't look as sexy as some think in the near term.

Silver™

Which leaders today have the courage to due so.

I am not debating the solution, just looking at the real near term realities.

Moog-Type-S

^^ There is no other real solution....unless we default

Silver™

^^^

And Japan has been able to increase their public debt to nearly 4x the ratio as we currently have, meaning that our current crop of spineless leaders could continue to pile on debt instead of facing the real fundamental issues.

Moog-Type-S

^^ Don't think that is going to happen in this political climate.
November is going to change things.

Inflation is coming.

Silver™

^^^

I hope you are right, but the current crop of GOP and Obama in the White House still leaves we with some doubts.

Moog-Type-S

^^ I don't care if they are GOP, DEM, GREEN....etc.

I want people who UNDERSTAND economics, and not some rah-rah socialists pushing some crazy utopian programs "for the good of the people."

If that continues, say bye bye to the old USofA. We will be a member of the PIIGS.

Silver™

As do I, but the reality is that most of the people who get elected likely won't.

Professor

Do you realize that if everyone elected were educated in economics, there would still be disagreements due to varying econ theories?

Silver™

^^^

Yup.

Moog-Type-S

Do you realize that the vast majority of those elected have no clue about economics, and that increasing that pool by perhaps even as little as 15% by people who understand economics would make a difference?

Professor

^ But according to some of your other posts, you would take Larry Flynt (successful CEO) over an Assistant Professor of Economics from the University of Chicago for the position of Congressman. ;-)

Silver™

^^^

Of course, can you imagine how cool it would be to have Larry in congress

Professor

No. Because economists don't agree (i.e., Keynesian v. Friedman v. micro-behavior.). You are thinking that social sciences are like hard sciences. The only thing an economics wave would accomplish is that the players would be speaking the same jargon... but it still would be Apple v. PC.

So should we require (like age requirements in the Constitution) at least thirty hours post baccalaureate in Economic theory to hold an elected position?

Professor

CSPAN ratings would go up.

Silver™

A quick Econ 101 course before you get a seat in Congress wouldn't be such a bad idea.

Moog-Type-S

Perhaps you are on to something.
Clearly from the President on down they have no idea and lack qualifications for their positions.

Washington fixing the economy today is like asking someone to design a rocket, but the designers don't have to be rocket scientists.

Professor

Again you are using a hard science analogy. You can measure thrust per metric ton with some certainty.

When I finished defending my dissertation in Economics (social science), my chair pulled me aside and said "congratulations you are now a weatherman. Just keep some plausible explanations using the jargon when you fuck-up." In otherwords, an economist can not fix the economy; he/she can only explain what happened after the fact.

Moog-Type-S

The fact that we can elect any clown to a political position, and then think that they are knowledgeable at what they do is nuts.

...and that is the problem today, we have elected officials that know nothing other than how to get elected and re-elected and become a career politician.

However they do know how to do one thing well: pay back their contributors....they do that very well.

LaCostaRacer

I've been a little busy, so couldn't respond to now- these are certainly good points though.

I did find a good article in the financial times that explains why Japanese debt is not nearly as bad as U.S. debt. The biggest reason is most of the debt is domestically held by the Japanese since its people actually save money- unlike most Americans. The U.S. has only a portion of debt covered internally- much of it held by Social Security. However, many foreign countries also hold our debt too- Japan being one of them. Since Social Security is no longer a profit center for the government, the dynamics are going to shift quickly because the U.S. now will rely more heavily on outside parties to finance its debt and the interest rates paid will be trending up. Just watch- I see today as a great buying opportunity for the TBT i-share ($49.04) because it was down hard from a pretty good upswing the last few weeks. I'll be buying some more possibly even tomorrow.

Here's the link for anyone interested: http://www.ft.com/cms/s/0/cb125274-1...44feab49a.html It's a short article and worth a look.

I'm happy to see that both gold and silver did their job helping my portfolio outperform the SP500 today despite the small setback on 4/6/10. Oil was down today so not all commodities fared well (to be fair).

Silver™

As you mentioned earlier, Japan's demographics are working against it (older / smaller population) in the coming decades. That will make it even harder for Japan to keep servicing that debt internally as people withdraw their savings in retirement. Also, with the low returns, most foreign investors don't pay much attention to Japan anyways.

The IMF put out a study on this last year if you are interested:

Historically, Japan’s public debt has been financed in a fairly smooth manner. The large pool of household savings and the stable domestic institutional investor base appear to have contributed to this successful experience. However, Japan is already undergoing rapid population aging, which will likely limit the market’s future absorptive capacity of public debt. In addition, structural shifts in institutional investors could also serve to reduce market demand.

http://www.imf.org/external/pubs/ft/...09/cr09211.pdf


With Japan's returns so low they are going to have to significantly increase their rates if they are going to attract international investors, which will make servicing the debt far harder than for the larger and more dynamic US economy.

Thats not to say we don't have worries when it comes to our debt, just that I think we are in better shape than the Japanese.*



* As long as Obama puts away the checkbook.

Moog-Type-S

The metals are all back at pretty much at their 52 week highs

Silver™

Several benchmark commodities sold off amid worries that the sovereign-debt crisis in Europe would cripple the global economic recovery.

Crude-oil and copper futures sank after Standard & Poor's Corp. cut the credit ratings of Greece and Portugal. The S&P GSCI, a commodities gauge heavily weighted toward energy markets, slid 1.6%

Gold, however, rose after the ratings cuts, again taking on a role as a safe haven for investors in times of intensifying uncertainty. Large funds often sell riskier assets during crises and park their cash in gold.

Gold futures in New York ended $8.20, or 0.7%, higher at $1,162.20 an ounce.

"Gold is going to move higher as long as there are fears of problems in Europe," said Adam Klopfenstein, senior market strategist with Lind-Waldock, a division of MF Global. "People are starting to have more skepticism about these sovereign entities."

Commodities prices have recovered since dropping in 2008 amid the credit crisis and recession thanks to strong demand in emerging markets such as China and India, but analysts say this pillar is looking shaky.

Equity markets in China fell on fears that the Chinese government will take more directed action to rein in the housing boom there. Commodities investors in the U.S. took this as a cue that metals consumption in China is likely to grow at a slower pace. Copper futures dropped almost 5% to a one-month low of $3.3635 a pound.

The dollar's rise on Europe's debt woes is also putting pressure on commodities, which subsequently become more expensive for foreign buyers.

"Much weaker Asian equity markets and a stronger dollar have put the base metals under pressure," said Standard Bank analyst Leon Westgate, referring to metals that are widely used in industry.

http://online.wsj.com/article/SB1000...855735616.html

Silver™

Commodities may extend their decline after dropping the most in three months yesterday as raw- material prices track equity markets, according to a technical analysis from Barclays Capital.

The attached chart shows the S&P 500 index and S&P GSCI Index of 24 commodities in a so-called topping pattern, indicating further losses. Should the S&P GSCI fail to close above 533 points, the gauge may drop toward 510, said Phil Roberts, a Barclays analyst in London.

The S&P GSCI declined 0.3 percent to 534.321 as of 10:29 a.m. in London, paring this year’s gains to 1.9 percent. Futures on the S&P 500 were 0.1 percent higher.

“Because equity markets are an excellent barometer for investor attitude toward risk assets generally, this points to further commodity market weakness in the sessions ahead,” the bank said in a report today.

http://www.bloomberg.com/apps/news?p...d=aXCIShnfoNP8

Moog-Type-S

Bye bye oil....hello metals

LaCostaRacer

I think Gold and Silver are going to move pretty quickly up now. Everyone talks about how 'expensive' gold is, but it really is cheap compared to the current price of the Dow. Even after today's Dow haircut the Dow is still 8.81x the price of one ounce of Gold. This ratio will be changing with my target at about 5.0x. Assuming the Dow drops down to 8000, that would factor gold at 1600 which I'm very comfortable with as a 6 month prediction on the price of Gold. We'll see in 6 months how right or wrong this prediction might be but in the mean time my money is very much aligned with this premise and very short the Dow. It will be an interesting Summer and Fall.

Moog-Type-S

http://www.reuters.com/article/ousiv...6495XB20100511

Pete2010

Every portfolio should have some gold. I increased my GLD holdings last month, never looked back.

Silver™

As an investment, gold has never been more popular. And, for individual investors, that's part of the problem.

Gold spot prices hit a record of $1,243.10 per ounce in Comex trading on May 12 before slipping $13.90, or 1.1 percent, to $1,230.10 on May 13. In the past three years, the precious metal is up 84 percent. The SPDR Gold Shares (GLD) exchange-traded fund now contains $48.1 billion in assets, with the number of shares outstanding up 111 percent since September 2008.

Encouraged by TV and radio ads touting the virtues of gold, retail investors are buying it up. One leading gold dealer, Goldline International, estimates it has added 50,000 clients in the past three years. The gold frenzy is worldwide: On May 13, a vending machine that dispenses gold bars was unveiled at Abu Dhabi's Emirates Palace hotel.

Financial experts warn that all this enthusiasm for gold could be a warning sign—that gold prices could be near their peak. "It's very in vogue right now, which is usually a telltale sign [of] a bubble-like mentality," says James Miller, president of Woodward Financial Advisors in Chapel Hill, N.C.

Gold's advocates may be right that the metal could head higher still, driven by the fiscal crisis in Europe, high deficits in the U.S., and fears of inflation. "All we can do is put our money into real assets, because paper money everywhere is being debased," Jim Rogers, chairman of Rogers Holdings, told Bloomberg Television on May 12 as gold hit new highs.

But even if gold keeps rising—a prospect very difficult to predict, given the metal's volatile track record—there are several features of gold that make it treacherous for individual investors, financial advisers say.

Gold might have a reputation as a "safe haven," but nothing could be further from the truth, says Susan C. Elser, of Elser Financial Planning in Indianapolis. Unlike other commodities, gold has few industrial uses. Unlike businesses owned through the stock market, gold earns no profits and doesn't pay out dividends. Unlike bonds, no one pays interest to holders of gold. And, unlike insured bank deposits, there is no guarantee of your principal investment.

"There is no downside protection on investing in gold," Elser says.

Gold used to be the backing for currencies, but no longer. Now "it really is only a store of value because people say it's a store of value," says Ken Eaton, principal at Stepp & Rothwell, a financial planning firm in Overland Park, Kan. That can lead to extreme volatility, which financial planners cite as one of gold's biggest downsides.

Gold may be up 84 percent in three years, but it has taken a wild path to get there. Most recently, gold fell 12.6 percent from Dec. 2 to Feb. 8, then rebounded 16 percent in the next three months.

Much of gold's appeal is built on its use as protection against inflation, which some—but not all—investors see as a potential threat.

"We're in very unusual times," says Barbara Camaglia, head of Legacy Financial Advisors in Beachwood, Ohio. "Everyone is debasing their currencies, so I think having some gold is not a bad idea."

Gold is just one part of a diverse portfolio, she says, with a portfolio allocation often kept to 5 percent, though "you could argue for a higher percentage." A small gold holding is typically recommended even by financial planners, like Eaton, who are skeptical of buying gold now. Gold is one sliver of commodity holdings that make up 2.5 percent to 5 percent of his clients' portfolios, Eaton says.

It's true that gold kept pace with inflation in the 1970s. The annual increase in the consumer price index averaged 9.3 percent from 1973 through 1981. The market price of gold at the end of 1972 was $63.91, rising to $456.90 by the end of 1982. That's a 615 percent increase, compared to cumulative inflation from 1972 to 1983 of 138 percent.

However, gold's record as an inflation hedge is more mixed over the long term. Because gold fell from 1980 to 2001, the metal's total appreciation from 1972 to 2001 was just 336.5 percent. That barely beats inflation over those 29 years of 323.7 percent, and is way behind the 2,466 percent return of the broad Standard & Poor's 500-stock index if dividends are included.

"There are [short] periods of time—like now and the 1970s—when there is really a lot of uncertainty out there, and people flock to [gold] for safety," says Miller of Woodward Financial Advisors. But gold's long-term record is weak, he adds. "It's a short-term trading vehicle rather than a long-term investment."

http://www.businessweek.com/investor...513_844554.htm

Moog-Type-S

Oh noes....who knew gold is not backed by the FDIC and does not pay dividends?!?!?!

ooof....who right this

....and you gotta be out of your mind if you think the U.S. is not going to have to inflate itself out of this mountain of debt.

Silver™

When is that gonna happen? Next month, next year, next decade, etc...?

And once we reach that point what makes gold such a great investment, why not other metals (silver, platinum, etc...) with greater potential upside.

As of late gold feels like dot-coms in 1999 and house flipping in 2006. Even my grandma is talking about it and it is getting driven up as much by momentum as sound fundamentals. Look at a chart of gold during the last 5 years and tell me it doesn't remind you of other recent bubbles.

Moog-Type-S

^^ I never said anything about investing or not investing in other metals.

I commented on your gold article....oof what an article
I'd stay away from copper, however.

The inflation monster is coming...as with any investing, it's difficult to predict "when".
...but it is coming, no doubt.

Long term versus short term investing in the metals market...and when the inflation monster shows up......the question is.

Get your heavy metal on

Silver™

You are right, you did comment on my gold article, that is why I was making a point about gold and the gold fever which seems to be increasing.

I never said you said anything about other metals



Not sure what your issue is with the article?



So is the deflation monster, the recession monster, etc...

No one knows when, but those monsters are coming too, and maybe even before the inflation monster. It's been 20 years and the inflation monster (Mothra) hasn't hit Japan yet, they are still fighting the deflation monster (Godzilla)