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COMMODITIES
REVIEW: BREAK OR BOUNCE TIME
by Michael
A. Nystrom
August 29, 2006
Close
to two months have passed since my
last commodities report on July 9th. At that time, gold staging a
rebound after its precipitous decline from its multi-year high, and I
was speculating aloud as to whether gold and the rest of the commodities
had put in tops. So far, clarity remains elusive. Things don't always
unfold as quickly as we'd like to see them to in the market, but each
day brings new clues to examine and ponder. Let's see what the market
has had to say over the past two months: (Charts and data through Friday
August 25)
US Dollar
This time we'll start with the dollar, as it is still
the measure of all commodities. I had been expecting at least a
short-term rally in the buck, for the reasons detailed in my article, The
Case For a Rising Dollar.
We had a false start with a nice rally to 87, but
that collapsed into new intermediate lows. A shallow uptrend on the
daily chart remains intact. The net result is that there has been very
little significant movement, basis the September dollar index. But there
is at least one encouraging sign: Though the buck has thus far refused
to rally, it has likewise refused the all out collapse that seems
unanimously expected. Instead, it has managed tenaciously to cling to
critical support in the 84.5 - 85 area. It is also worth noting that
each time the world is threatened with "terror" (the latest
incident being the UK liquid plane bombing incident), the dollar seems
to like it, and rallies.
Gold
Next, let's take a look at gold, the anti-dollar.
A month ago, gold was just approaching the 50%
retracement level from its multi-year high, and looked ready to turn
down. It managed to make it all the way to its 2/3 level retracement,
but then collapsed back to support around 600. This was followed by
another weak rally - not quite as high as the last - and now it's headed
back towards 600. Whether it breaks or bounces at that level should tell
us pretty clearly which way gold is going, at least in the intermediate
term. At this point, the rally kind of has a dead
cat bounce feel to it.
Oil
The news a few weeks back that BP was going to have
to shut down its Prudhoe Bay operations caused oil to jump $2 in one
day, to $77. That was a big move, but curiously, the news wasn't enough
to push oil to a new high. In fact, the price of oil actually turned
down the next day, and has since fallen nearly 10% from it's high, back
to support around $70. But IF world oil supplies are as tight as they
say they are, and IF demand is as strong as they say it is, and IF we're
at or have already passed peak oil, I would have expected news of the
shutdown - remember, this is 4% of America's output - to have caused the
price to really start to run away. The BP news came right at the time of
peak tensions in the middle east, yet oils still couldn't manage a
decent rally. From a bullish standpoint, something here is not right.
Remember last year the price of oil peaked just when
the news looked the worst -- right when Katrina hit. But here we are
again, a full year later and prices are about the same. The summer
driving season is over, winter is still some time away and we've hit a
period of relative calm in the Middle East. Looks like we should be
entering a relatively dead period for oil.
Sugar
I'm going to highlight sugar and corn this time
because I believe that the market recently has been viewing these two as
energy plays -- potential quasi-substitutes in the event of runaway oil
prices. (By using sugar to produce ethanol, Brazil has been able to wean
itself off imported oil, and is completely energy independent. The US
could do it too, if our government had the independence, political will
and backbone to stand up to Big Energy. But at this point in American
history, Big Energy has its fingers so deep in the running of the
country that any such policy is simply impossible. If the first American
Revolution was fought in part to win the separation of church from state
power, no doubt the second will be fought for the separation of
corporate from state power. But I digress.)
At any rate, the price of oil is under control. High,
yes, but it is not running away to $100 per barrel and beyond. (I even
wonder if BP's news wasn't manufactured to keep the price high, because
high prices are good for Big Energy, and they (President Texas and VP
Oil) are running the country. But that would be a conspiracy theory
http://www.youtube.com/watch?v=N5I7NFracPU , and we are told not to
tolerate conspiracy theories. So we shouldn't) At any rate, take a look
at what happened to sugar:
Terrible, isn't it? Ugly. Probably what the US
housing market is going to look like next year. But this is good for
Brazil - they've got cheaper energy, good for anyone who was short
sugar, and good for people who like sweet treats like donuts and candy,
like many Americans.
Corn
Last year when corn was plentiful, and the price of
oil was high, corn burning stoves looked to be all the rage.
Manufacturers sold out of them and had waiting lists a full year long.
This, and considerable ethanol hype also helped corn to post a modest
rally since last December. It looked like the start of a new bull market
in corn, but the rally has since made a complete round trip, and corn is
back to where it started last December. Like sugar, prices began their
collapse in the middle of July (chart not shown). If my thesis is
correct, that the market has been viewing sugar and corn as quasi-oil
substitutes, then we shouldn't be expecting $100 oil anytime soon, and
the rallies in sugar and corn are finished.
For an excellent Elliott wave analysis of the price
of oil, with biting commentary that only Robert Prechter can provide,
see EWI's free report: Is
the Price of Oil Really High? (Sign in required) Here is a hint as
to what the report has to say about peak oil's impact on humanity:
Copper
How does that old saying go? Every economic expansion
has a copper roof on it? Something like that. Maybe some old timers out
there remember how the saying. The point is that as the economy starts
to overheat, the price of copper goes up and puts a damper on economic
activity. Copper is used extensively in building - copper wires and
pipes in housing. We don't need to be reminded of how the US housing
market is going. When we see copper topping out, the end of the
expansion is nigh. Commodities cannot rise on speculation alone. The
boom relies on a continued economic expansion to make it real.
Copper's chart looks a lot like gold's - it speaks
for itself. Like with gold, it is break or bounce time - either it will
bounce once again off of it's support zone, or break down through it.
Same story for the CRB Commodity index. By the time I write my next
update in a month or so, we should have some added clarity. (Sign up
here if you'd like to be notified) In the mean time, you can follow
along yourself with this excellent source for free commodity charts on
my website.
The bottom line is that, it looks like the tops are
in for the year, at least to me. Further evidence - here
come the Japanese, rushing into the commodity market:
TOKYO
(Reuters) - Commodity markets, long shunned by cautious Japanese
investors as too risky, could see an inflow of billions of dollars in
the next few years as financial firms in the world's No. 2 economy hike
exposure in hopes of big returns.
How
does that other old saying go? The top isn't in until the Japanese start
buying? Well, someone's gotta get stuck holding the bag at the end…
© 2006 Michael A. Nystrom
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Michael A. Nystrom
Cambridge, MA
www.bullnotbull.com
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