Four Catalysts Needed For The Industrial Commodities Rally To Resume

Tyler Durden's picture

The recent sluggishness in equity markets has certainly affected industrial commodities over the past few months, if not gold, which as pointed out earlier is just 2% below its nominal highs and rising despite the 4th margin hike on the Shanghai Gold Exchange overnight - once again gold is seen at the apex of the fiat currency replacement pyramid. So what could cause a rally in industrial commodities in the near term? Sean Corrigan lists the four key catalysts, whose occurrence listed in order of probability, could rekindle the recently faltering rally.

From the most recent edition of Sean Corrigan's Material Evidence

So, the burning question now is whether commodity prices can shake off the disquiet caused by May’s sharp liquidation and validate the soundbite suppositions of the past few days.

With so much hot money still swilling around the world, readily available at low nominal and largely negative real rates of interest, we can never say never, but so many other beneficiaries of the Bernanke Bubble are either losing momentum and/or breaking trend, that it may be that the whole shell game has been busted pro tem.

Certainly, the fundamental backdrop is beginning to look less rosy, with Japan suffering a 13% decline in exports, Taiwan’s industrial expansion slowing, Thailand’s turning negative, US macro numbers registering a series of disappointments, UK businesses still cutting back on investment and broad swathes of China’s corporate landscape experiencing a severe margin squeeze.

Our feeling is that for a significant rally to take place from here (that is, without enduring any further, intervening weakness), one of four things has to happen soon, listed here in a loose order of their assumed probability:?

  1. The Japanese government will forego the chance to introduce the meaningful, permanent fiscal rebalancing to which it might accustom the electorate under the guise of a supposedly temporary, disaster?relief measure and inveigle the BOJ into monetizing (albeit at one remove) the vast reconstruction effort needed in the country instead.
  2. The Chinese will prematurely relinquish their fight against the inflation which was unleashed by their huge, unfocused stimulus’ efforts of the past two years, in the estimation that the threat to the regime’s predominance posed by slow growth and falling employment is now greater than that posed by rapidly rising prices.
  3. The Fed will find an excuse to revisit a programme of ’quantitative easing’ (i.e., money printing) without first being forced to sit by and watch a prolonged retrenchment in economic activity
  4. The US dollar will undergo a renewed, sharp decline, allowing existing carry?trades and ‘Risk On’ mixes to be reinstituted with the least demand for original thought. Here we should note that while, ceteris paribus, a flight from the dollar should not automatically boost commodity prices in other currencies, a combination of having a greater marginal impact in a much smaller market and the active contracting of paired trades does in practice tend to bring about such a broad appreciation.

If none of these US Cavalry troopers appear over the horizon in a timely enough fashion, or until there is unequivocal evidence that speculative appetite has otherwise fully returned, our worry is that the industrial commodities in particular remain at risk of another 10?15% correction and a more thoroughgoing purge of leveraged long positions before we can find some sort of meaningful base from which to re?enter a fuller exposure.