Posts Tagged ‘precious metals’

Little Update on Commodity Re-Thunk

January 13, 2015 4 comments

Reading some of the comments people have posted in various places, I thought it would make sense to spend the time to re-create the projected-index chart in the prior article, but using something approximating GSCI weights. The GSCI is production-weighted, which means it is very heavily energy-linked (I used 2008 weights just because they were the first ones I found: 78% energy, 10% agriculture, 6% industrial metals, 3% meats, 3% precious metals), yet I was comparing its 10-year real return to an equal-weighted “prediction.” How much does this change the picture?

As it happens, quite a bit. Here is the new chart (sourced: Enduring Investments).


Big Trade, Little Door

April 15, 2013 7 comments

In ordinary times, the terrorist attack at the finish line of the Boston Marathon (officials are being careful not to call it “terrorism,” but I’m not an official so I can operate in the reality sphere) would absolutely trump anything that happened in the markets today and, in fact, would likely have been the cause of any market movement that actually occurred. That’s because most of the time markets echo the framework of the rest of reality: most of the universe is space, and most market activity is just empty noise.

This is the reason that traders who are continuously transacting in the markets are called “noise traders.”

But on Monday, there was plenty of market action and it had nothing to do with Boston, nor with the slightly-earlier ultimatum from North Korea to South Korea, which stated that military action would “start immediately.” (N.b.: There were many losers today, but one of them surely must be reckoned as Kim Jong-un. A tin-pot dictator makes a threat, and is almost immediately knocked off the front page of the New York Times by events in Boston. That must really annoy him.)

Before the attack in Boston, however, there was already plenty of financial pain. The carnage in the precious metals pits came right on cue after the negative sell-side reports of late last week had a chance to work on the psyches of investors. Gold fell 10%, and silver nearly 14%. This represents the worst two-day fall in gold in thirty years. And, while yesterday I pointed out that the commodity “super-cycle” certainly doesn’t look like one, I can understand how the picture of gold in real terms looks like it may be completing something big (see chart of gold expressed in December 2012 dollars using CPI, source Bloomberg).


There is considerable concern tonight that these losses may provoke selling in related markets as investors raise funds to meet margin calls. This is possible, although significant thumpings in the past in precious metals (it isn’t like this is the first time we’ve seen volatility in a commodity) didn’t provoke dramatic related-market action. To be sure, the avalanche is much more loaded now than it has been in the past, with equity markets sharply overvalued and investors already reaching a level of disgust with commodities. But I don’t think it goes too far. (Those may be my famous last words!)

What happened in gold and silver is a function of the big trade/little door syndrome, more than anything else. News outlets blamed the weak data yesterday in the U.S. and the small miss in Chinese GDP (7.7% versus 8.0% expected, but keep in mind that we all know these are made-up numbers) for setting off the wave of selling, but that’s just the latest straw. The break of technical levels on Friday, combined with the suddenly-burning desire of hedgies to not be the last one through the little door, is what led to such a dramatic move today. It may well continue until everyone who wants to get through the little door has done so. Or, it may not – but I would admonish an investor who wants to buy gold here to think like a trader rather than a playground monitor: don’t try to break up the fight. If the hedgies want to eat each other in a fight to get to the door, let them.

And, incidentally, remember that the big trade/little door syndrome is not limited to gold and silver. Think about equity exposures too. If you’re long by policy, fine. But if you’re long stocks and feeling uncomfortable about it, then “sell down to the sleeping point” at least.

The irony of the timing of the gold rout is potentially juicy, with CPI tomorrow. The decline in precious metals is happening partly because so many investors are abruptly convinced that inflation has truly been defeated. It is incredible to me that this belief is so widespread, but perhaps this is the sine qua non for the next washout in financial markets and the setup for the long-awaited up-move in commodities (for, although the “super-cycle” is evidently just now ending according to some observers, commodities prices have been in general decline for the last two years).

Growth is falling short of expectations, but that doesn’t have any implications for inflation. Tomorrow’s CPI is forecast to be flat and +0.2% on core, holding core inflation constant at 2.0%. Sentiment appears to be favoring a shortfall in those figures, but it is my belief that we are on the cusp of the next sustained move higher in core inflation, to be led by housing. Remember that the last two CPI figures haven’t exactly been soothing. Two months ago, core inflation was +0.3% when the market was expecting +0.2%. Last month, all eight major subgroups of CPI accelerated on a year-on-year basis, the first time that has ever happened since the current 8 subgroups have been in existence. I am loathe to pick the month where we’re going to see Owners’ Equivalent Rent finally break higher, because econometric lags are not written in stone. But it ought to be soon.

When it happens, expect sell-side economists and pundits of all stripes, to say nothing of the Federal Reserve, to downplay the significance of it. I wouldn’t expect a sudden rally in commodities or a rebound in breakevens (10-year breakevens are at the lows of the year, mainly because rates on the whole are declining – 10y TIPS yields are also within 3bps of the year’s low), but it might help stop the bleeding.

Subprime Sovereign Europe Still the Focus

February 21, 2012 Leave a comment

Like everyone else, I want to believe that the Greek bailout this time really is ‘done.’ Of course, my main reason for wanting that outcome is that I am weary of writing about all of the deals, which turn out not to be deals, which get trumpeted as deals again, and so on.

Over the weekend, we were assured that there was finally a solution to the Greek crisis. The ECB (and it turns out today, other European central banks) will swap their bonds for new Greek bonds that will not be subject to haircuts. Meanwhile, private bondholders will take a haircut and get new bonds worth a lot less, although this afternoon the head of the IIF (the group responsible for the PSI negotiations) told the BBC that this will only work if CDS owners don’t choose to trigger their payouts. So, as long as private-sector bondholders choose to take less money, this is all good. The IMF is also reportedly contributing less to the deal than had previously been expected. And all of this is subject to approval by a number of legislatures.

So the problems of subprime sovereign Europe have not yet been put wholly to rest. The markets seem unsure on this point. Stocks ended essentially unchanged after hitting new highs in the morning, on continued low volume. Bond yields rose, with the 10-year nominal bond up 5bps to yield 2.06% and 10-year TIPS 2bps higher to yield -0.24%. That would seem to indicate some marginal lessening of tensions, but with volumes thin and equities near-unchanged I think such a read would be premature. The VIX was higher on the day, although it remains lower than it was last week.

Commodities had a banner day, relative to equities, with the DJ-UBS index +1.35%. Precious Metals led the way with a 2.75% gain and Industrial Metals rose 1.6%. Energy, however, will get the headlines. Although Nat Gas blunted the performance of the group, NYMEX Crude rose to $105.50, the highest level since May and 40% above the October lows; Brent reached $121. Gasoline jumped a nickel to $3.0661/gallon, the highest since driving season and the highest print ever for the March 2012 contract.

This seems like the first time in a while that commodities have simply smoked equities, but since the beginning of the year they have kept pace…if you leave out Nat Gas. Our preferred ETF, USCI, is up 8.98% year-to-date compared with 8.32% for the S&P. The correlation has been far too high for our tastes, suggesting that both markets are trading QE3 rather than inflation expectations. But they too are higher: the INFL Deutsche-issued ETN is +5.0% year-to-date.

While all markets move in lock-step, it is hard for me to believe that the earthquake has happened. Whether it’s the earthquake of Greece failing and banks coming clean about their losses therefrom (and a potential unzipping of other subprime sovereigns), or it’s the earthquake of Greece getting bailed out successfully and causing the line of sovereign supplicants to extend around the block, there’s some kind of resolution coming that should fracture, at least for a while, these high correlations. I believe that in such a circumstance, commodity indices are the best-valued and most likely to come on top…but we will see.

However, Bloomberg claims that the S&P is the cheapest relative to bonds it has ever been, since 1962. I enjoy the presumably-unintended bias in construction. Why not say, “Bonds are the most-expensive, relative to stocks, that they have been since 1962?” Both would be true, if the metric they’re pushing (the spread of the ‘earnings yield’ to the 10-year Treasury rate) is the right metric, but one headline implies that stocks are cheap on an absolute basis while the other headline doesn’t imply that. Our equity culture is alive and well, sadly; but there are many more arguments to be made that both bond and stock prices are too high than there are to be made that both are too low. And of course, as I’ve pointed out before, saying that stocks are cheap relative to something else is not the same as saying they are cheap, in the sense they will have better-than-average returns. By the same token, TIPS are extremely cheap relative to nominal bonds, but I would not suggest owning them outright at a -0.25% real yield. So if you want to buy stocks and sell bonds, or you want to buy TIPS and sell bonds, you may have a winning trade…if you weight the trade right. Be assured that the correct weight is not equal notional amounts. That is, if you sell your short-term bond portfolio to buy an equity portfolio dollar-for-dollar, you probably have more risk to markets returning to fair value even though bonds are expensive to stocks.

On Wednesday, after an overnight session filled with updates, clarifications, exceptions, and corrections to the so-called Greece deal, we will get to enjoy the happy news about January Existing Home Sales (Consensus: 4.66mm from 4.61mm). Since the weather in January was better-than-average, it is fair to expect a strong number, which means the market ought to react more to any downside surprise than to an upside surprise. But the magic number is 5 million. Existing Home sales haven’t been there, except for a brief spike in late 2009, since 2007. But prior to 2002, a pace of 5-5.5mm Existing Home Sales was a fairly typical level (see Chart, source Bloomberg), and would imply that properties are finally starting to clear at something like normal rates. The data may be a little messy for a few months as bank REO property gets put back on the market (potentially driving up both inventory and sales numbers), but 5mm is the level to hope for.

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