What's causing surge in commodities?

HarvardOrBust's picture
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What has caused the recent surge in commodity prices? From what I know, long commodities is a hedge for inflation, except if QE2's goal was to reverse deflation and have normal levels of inflation, then assuming the surge was based on bets of rampant inflation and we end up getting normal levels, would this not be the next bubble? It doesn't make sense to me that commodities would sky rocket if there were no real catalyst for it, so maybe there is another factor involved.

Comments (26)

Dec 13, 2010

Get yourself a trial subscription of the Gartmann letter. Wheat prices are going through the roof in part because it looks like Russia will have to import this year vs being a net exporter. Crops are looking to yield lower and that is increasing the price.

Cotton is on a run also. I believe India is driving the price of that up (not 100% on this). Strong demand for Soybeans also .

Dec 13, 2010

Commodities aren't he hedge for inflation, they are the inflation! Caused by lower interest rates, weaker dollar, increased demand from China and emerging markets, and poor harvest in Russia.

Dec 13, 2010

To Anthony's comment about cotton, it's at its highest level in 140+ years...

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Dec 13, 2010

Looks like you just got double teamed at the same time.

Dec 13, 2010
Gekko21:

Looks like you just got double teamed at the same time.

Is there a way to get double teamed other than at the same time...if there is can you draw me a Midas like diagram and send it to me?

If I had asked people what they wanted, they would have said faster horses - Henry Ford

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Dec 13, 2010
happypantsmcgee:
Gekko21:

Looks like you just got double teamed at the same time.

Is there a way to get double teamed other than at the same time...if there is can you draw me a Midas like diagram and send it to me?

There is the old 1 and then 2 or there is the 2 holes at the same time......ask your parents to draw you a diagram.

Dec 13, 2010

Monty09.

People tend to think life is a race with other people. They don't realize that every moment they spend sprinting towards the finish line is a moment they lose permanently, and a moment closer to their death.

Dec 13, 2010

What about copper; demand growing, supply diminishing

Also all the BBs are betting on it

"Seeing this house and your fine sword and hearing how you're importing and exporting chinamen, let me guess, you must be fucking rich."
Kenny Powdersss

Dec 13, 2010

I also think you have this huge desire to own or deal with something tangible and real.

Palladium - Driven by auto sales, especially in developing nations

Gold - Dollar and speculation

Silver - Some interesting market forced (JPM cough)

Gartman is great as well as the Schork Report for oil/gas

Dec 13, 2010
MSFHQ:

I also think you have this huge desire to own or deal with something tangible and real.

Palladium - Driven by auto sales, especially in developing nations

Gold - Dollar and speculation

Silver - Some interesting market forced (JPM cough)

Gartman is great as well as the Schork Report for oil/gas

Anthony?

I win here, I win there...

Dec 13, 2010

Commodities only cause about 10% changes in CPI (at least according to Meisirow Financial's December Letter). So they really don't cause inflation as much as Wages (tied to unemployment rates and output gaps).

Ian Bremmer, of the Eurasia Group, has an interview on Bloomberg.com talking about this (Bloomberg is being weird and not letting me access any articles tonight). Besides increased demand for consumption, stockpiling of commodities is becoming popular because other nation's have less faith in the dollar and other fiat currencies. Thus, they are buying commodities to put into storage as a hedge against currency devaluation. Ironically, this in itself creates inflation (again, not as much as wages would), thus creating a positive feedback loop when done in large quantities.

Dec 13, 2010

Yes, Anthony

Dec 13, 2010

One overlooked aspect of the meteoric rise in commodities prices is the explosion of ETFs on the market. The ETFs open the market to investors who normally wouldn't touch commodities with a thousand-foot pole due to unlimited risk in futures. More than 90% of ETF investors invest on the long side (in other words, they buy - not short - the ETFs)

Billions (and probably trillions by now) have been plowed into commodities ETFs over the past 5-10 years (I'm including the GS commodities index), and every penny of it is speculative money, creating (or at least exacerbating to a great degree) the current bubble in many asset classes.

When you factor that speculative bubble in with environmental factors such as lower crop yields, you're naturally going to get vastly inflated prices, such as cotton and wheat currently.

The unfortunate side effect of all this speculative money flooding into commodity ETFs is that it drives prices up for the end user, who are the people least able to afford it. They're not speculators who will benefit from the rising prices; they're the people trying to feed a family upon whom the speculators prey.

Dec 13, 2010
Edmundo Braverman:

One overlooked aspect of the meteoric rise in commodities prices is the explosion of ETFs on the market. The ETFs open the market to investors who normally wouldn't touch commodities with a thousand-foot pole due to unlimited risk in futures. More than 90% of ETF investors invest on the long side (in other words, they buy - not short - the ETFs)

Billions (and probably trillions by now) have been plowed into commodities ETFs over the past 5-10 years (I'm including the GS commodities index), and every penny of it is speculative money, creating (or at least exacerbating to a great degree) the current bubble in many asset classes.

When you factor that speculative bubble in with environmental factors such as lower crop yields, you're naturally going to get vastly inflated prices, such as cotton and wheat currently.

The unfortunate side effect of all this speculative money flooding into commodity ETFs is that it drives prices up for the end user, who are the people least able to afford it. They're not speculators who will benefit from the rising prices; they're the people trying to feed a family upon whom the speculators prey.

Which is why my fears of communism and anarchy are always misunderstood...

The Red Plague doesn't being in Washington, Moscow or Berlin...it begins out in the street or the field when some poor broke and angry group of people decide they are going to start hedging with broken necks and ruptured spleens.

Dec 13, 2010

Look at it this way HarvardOrBust. I'll start at the top. America has been shipping out jobs overseas for YEARS. Basically creating and pushing emerging markets. Without a relevent manufacturing sector in the US they had to create another way to create jobs and cause Americans to spend $$. Whalaa! Home sales. Give loans without varified income. Contracting and real estate booming creating $$ flow for the economy.Banks get paid from loans. What happens when u buy a new home? U buy tvs, appliances, furniture, now you want a new car to get down with the jones. EVERY sector of the economy is booming now. America(government) gets paid from selling debt to oversea banks. The housing bubble burst. All of the emerging markets we helped create from yeeears ago are moving from poverty to middle class so their standard of living is increasing. IE eating and dressing better. Combine that with QE reducing the value of the dollar(commodities r cheaper to purchase w/ foreign $$), wacky weather(floods & droughts) wiping out crops as well as making poor crop quality, and as some guy said earlier the creation of FTFs as a less risker investment for the investor but a genius idea for the creator beacuse they know people are afraid of futures......Now you have a massive bull market for the next few DECADES to come only because the worlds population is increasing. Nothing creates demand more that shortage of supply right? u learned that in an intro economics.... that was just a quick overview of what is happening in the futures market.

Dec 14, 2010

The commodity bull run is driven by several factors. Looking at it from the top down, we have a weaker dollar and massive money-printing by central banks creating excess liquidity that is not needed for capital expansion. Investors have lost faith in equities and the sovereign bond market clearly does not offer compelling value at current valuations. Supply expansion plans for many commodities were shelved during the financial crisis due to the lack of credit availability. Emerging markets are on a tear and are rapidly building infrastructure. The global middle class is hungrily expanding. On an individual basis, many commodities have very bullish supply/demand factors. For instance - floods in Pakistan (mainly cotton but also grains), drought in Russia (mainly wheat but also other grains), weather problems in Australia and Western Canada (wheat but also other grains), record imports from China (soybeans and corn), stockpiling in China (copper), lack of new mines (copper), need of a currency replacement (gold), end of central bank sales (gold), etc. However this doesn't mean that the bull rally will continue forever (in the medium term, I am very bullish in the long run) as many of these markets are overextended technically.

Dec 14, 2010
macro:

The commodity bull run is driven by several factors. Looking at it from the top down, we have a weaker dollar and massive money-printing by central banks creating excess liquidity that is not needed for capital expansion. Investors have lost faith in equities and the sovereign bond market clearly does not offer compelling value at current valuations. Supply expansion plans for many commodities were shelved during the financial crisis due to the lack of credit availability. Emerging markets are on a tear and are rapidly building infrastructure. The global middle class is hungrily expanding. On an individual basis, many commodities have very bullish supply/demand factors. For instance - floods in Pakistan (mainly cotton but also grains), drought in Russia (mainly wheat but also other grains), weather problems in Australia and Western Canada (wheat but also other grains), record imports from China (soybeans and corn), stockpiling in China (copper), lack of new mines (copper), need of a currency replacement (gold), end of central bank sales (gold), etc. However this doesn't mean that the bull rally will continue forever (in the medium term, I am very bullish in the long run) as many of these markets are overextended technically.

I see somebody gets it......

Dec 14, 2010

Shit that makes a lot of sense. However, maybe long term implications are not that bullish? What happens if QE2 actually is extremely successful and accomplishes a few things:
- lower effective rates
- outflows of foreign capital due to lower rates, meaning a better balance in excess liquidity
- boom in equity markets
Do we see money moving from commodities back into a more attractive equity market? I know I'm missing a lot of things in between, but just making these assumptions here, what would be the net effect?

Dec 14, 2010

sadly i think it is a demand issue and not just the usual speculator problem

Dec 15, 2010
blastoise:

sadly i think it is a demand issue and not just the usual speculator problem

Where does that leave gold and silver? Can the redirection of capital flows into alternatives such as emerging markets slow the demand for commodities?

Dec 16, 2010
HarvardOrBust:
blastoise:

sadly i think it is a demand issue and not just the usual speculator problem

Where does that leave gold and silver? Can the redirection of capital flows into alternatives such as emerging markets slow the demand for commodities?

No, because base demand still supports high prices.

Dec 14, 2010

JPMorgan cuts silver futures positions
Posted by Joseph Cotterill on Dec 14 09:26.

JPMorgan has quietly reduced a large position in the US silver futures market in order to deflect public criticism of the impact of its dealing, a person familiar with the matter has told the FT. The person added that JPMorgan's position in silver would from now on be "materially smaller" than in the past. The move follows accusations by some investors that banks have created large short positions in silver futures that have kept prices artificially low. The CFTC has been investigating complaints of misconduct in the market since September 2008 but has ruled against claims of manipulation in two reviews. Traders added that JPMorgan created large short positions on New York's Comex exchange to hedge positions that were long on physical silver and London's OTC markets.

Financial Times

Was out early this morning just forgot about it.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

Dec 16, 2010
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Dec 17, 2010