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Global Tactical Asset Allocation Q1 Update: Commodities

Tyler Durden's picture


Global Tactical Asset Allocation Q4 Update: Commodities

From Damien Cleusix



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Wed, 01/26/2011 - 00:24 | Link to Comment TemporalFlashback
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Semi-OT. Baltic Dry Index down 53 today to 1292.

Wed, 01/26/2011 - 10:27 | Link to Comment 66Sexy
66Sexy's picture

Damien, put away the Robert Prechter video's; they zombify your mind.

Ya know what happened to people who listened to him? They lost their asses, selling gold @ 950 and silver at around 17.50. They probably also sold out of the stock market at 9,800 listening to 'Prechters Poison'.

Damien says commodities like oil, gold, and silver will fall over >50%<. This is the same as saying our dollars will buy 50% more of the assets; It's ultra bullish the dollar. Yet we all know the true fundamentals of the market; which are negative for the USA, Europe, and China. I could rant on and on about the problems with the global economy, as we all can. Real estate bubbles, unemployment, interest rates, gas prices, corporate and special interest lobbying, food riots, euro/dollar debt, entitlements, unions, government, muni's, states, etc etc.

QE will continue to devalue the dollar, by creating money to prop up markets.

You cant have both. Either the dollar climbs, commodities fall and QE fails over and over (which is not possible if they must continue it indefinately, and they will; and commodities will be bought as hedges with dollars against the money creation)... or the dollar falls, commodities climb, and QE 'works'.

You see where im going here.. commodities up no matter what in a terminal QE world, because the fundamentals are as such there can never be a true recovery; just a constant regression to the mean; core assets and commodities are all that will matter in that environment.

Wed, 01/26/2011 - 23:04 | Link to Comment xdenielx
xdenielx's picture

If i hear another person use the term "printing money" as a reason for why commodities will indefinitely go up I am gonna go nuts.  Have any of you guys actually thought about what "printing money" means?

Lets think about it.  The fed buys US treasury from the public.  Where the public once owned treasury, they now have cash.  Instead of owning an asset that yielded 1-3%, it now yields .25%.  Why do people suddenly assume that means that means the dollar should collapse and commodities should soar?!  Just because people now own cash instead of a cash equivalent treasury bond (which are practically the same thing as cash because UST is so liquid anyway) doesnt make them any more likely to go out and spend the cash and consume!!!  It doesnt change the fundamental value of commodities.  It's insanity.  Instead what happens is the public is now encouraged by the fed to speculate on risky assets.  They now own an asset that yields .25% instead of 2%.  So to make up for the lost carry, some of the people who would otherwise have owned treasury put some of that cash into stocks or credit, and speculators follow and pile on the leverage, and asset prices get artificially bid up. But as we saw with lehman brothers large amounts of leverage at inflated prices will eventually lead to a large RISK OFF collapse.  I think risky assets (non-PM commodities, stocks, credit) are due for a big sell-off sometime soon.  Watch how quickly the leverage comes off, the dollar rallies, commodities tank, and people reach for cash and treasury when the risk-off trade starts.

So to summarize my point is that just because people own cash instead of a cash equivalent (UST) doesnt change the fundamental value of the dollar or commodities.  It doesnt mean that the public will hold risky assets over cash at any price.  It just alters the public's portfolio in such a way that theyre encouraged to speculate, until the bubble pops. The $ and most fiat currencies were f***** a long time ago when we started running huge deficits that we could never pay off.  It's only that people are now paying attention to it because they realize that if we're doing QE and QE II, we have no way out.  That's why gold is rallying, because people now realize they need a hedge.  They ALWAYS needed that hedge, but they only realize it now.  It has nothing to do with turnign one type of cash asset into another.



Wed, 01/26/2011 - 00:26 | Link to Comment Orly
Orly's picture

Oops!  Sounds like it's gonna get brutal.

Thanks, Clue6.

Wed, 01/26/2011 - 10:14 | Link to Comment caconhma
caconhma's picture


- World is very busy printing fiat money like there is no tomorrow

- Gold down ~8% and gold mining stocks are down  ~20% from its top

- Most brokerage house recommend gold and other commodities selling



- With gold down additional 10%, most of world PM mining industry will stop its operations and its worth will go close to nothing

- India , China, Brazil, etc., will abandon cars and move back to bicycles. So oil will go back to $39/b.

- World food riots will stop too because people will stop eating and will lose extra pounds

- Finally, India , China, Brazil, etc., economies might slow down BUT they better feed their people (remember Tunisia, Egypt?)


I don't buy this kind of shit.



Wed, 01/26/2011 - 00:28 | Link to Comment teotwawki
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Gold and silver are so 2010. 2011 is all about the vix baby.

Wed, 01/26/2011 - 00:33 | Link to Comment topcallingtroll
topcallingtroll's picture

Take a ride on tyler's widow maker the tivx! I have been so tempted but i dont think this is a good point to buy tivx yet.

Wed, 01/26/2011 - 00:30 | Link to Comment topcallingtroll
topcallingtroll's picture

Ya....lots of reasons silver may bounce back quickly but it very well could be last year's darling. If it stays above 28 long enough and consolidates for a while i may have to rethink my toppish call and trollish ways. It had been so overbought for so long it needed a rest, at the very least. Anybody else sold out of their pm position yet? If the dow continues to fly for a while we may get a little rotation out of some of the commodities from the hot money crowd. Hot money and some of the weak hands are out silver right now already, but there is still a ton of pm complacency out there among pm enthusiasts ( not the broader public).

Wed, 01/26/2011 - 01:29 | Link to Comment Duffminster
Duffminster's picture

Hi top calling troll.  I've been in silver since about 1999 and haven't sold much.  I moved all my IRA holdings out of SLV and into PSLV because I don't trust the SLV trustee JP Morgan to not use the SLV in its possession to mess with the derivatives market, given their positions in the metals derivatives markets.

Yes, silver could pull back perhaps to $26 but all of the fundementals for having currencies without counterparties and central banks positions being shown to be closer to what GATA has been suggesting for years rather than what has been on their opaque books in regards to accessible inventories points to investment demand accelerating.

As for silver, the new applications for it continue to grow, including new advanced anti-microbial and anti-bacterial compounds for use in oder free clothing and public and medical faciltity sterile cleaning and other anti odor and public safety related applications as well as accelerating RFID markets, alternative zinc/silver batter designes, alternative nano silver catalysts, etc. along with the fact that above ground available inventories of silver bullion have dropped from around 10 billion ounces in 1940 to around 1 Billion ounces now and the fact that if your theory about a pull back in industrial metals holds true it will impact silver production quite negatively.

Silver mining production isn't keeping pace with industrial and fabrication requirements and only through scrap and some government selling has the gap of around 300 million ounces been able to meet supply.  For the most part global government silver inventories are running on empty while US mint sales of Silver Eagles hit a recent record and there are gloabl reports of silver shortages from major dealers and certificate redemption programs.

You might also want to keep in mind one another post here today about short term liquidity by searching for article entitled: 

Whispers Of The Inevitable Unwind Of The Fed's SFP Program And The Ensuing $200 Billion Liquidity Injection Commence

When this happens I expect, as does the article, that all commodities and the stock market are going to take off.

Yes, with JP now running the White House Chief of Staff and the proximal concurrent decision by the CTFC to exempt JP from its legacy positions in the position limits rules, it seems they are still doing a fine job capping and knocking it down and COMEX/NYMEX with its recent margine hikes coupled with seasonal commodity ETF sector rebalancing, silver has been under pressure, all I need to do is look at the 10 year chart on gold and silver and I can see where these two forms of real (non-debt encumbered) hard cold cash are going relative to the QE junkied debt encumbered fiat currencies like US dollar and euro. 

Its in this environment that one has to have very clear and strong understanding and comittment to the fundementals to be able stand pat in the massive bluff of fiat currency and its creators, the Federal Reserve. 

I like what Robert Pretcher wrote recently in regard to the dollar, which is looking weaker by the day and if the Chinese actually let the Yuan float will drop like a rock:

"...Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise...."



Wed, 01/26/2011 - 03:12 | Link to Comment sushi
sushi's picture

If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise...."


Minsky moment coming right up.

Wed, 01/26/2011 - 07:00 | Link to Comment prophet
prophet's picture

Nicely done.  Having tripled in two years silver is certainly interesting. 

Wed, 01/26/2011 - 17:40 | Link to Comment Lord Koos
Lord Koos's picture

You might want to consider that the trustee of PSLV is HSBC.

Wed, 01/26/2011 - 18:54 | Link to Comment attst487
attst487's picture

PSLV is Eric Sprott's physical silver trust. The trustee is RBC Dexia Investor Services.


Wed, 01/26/2011 - 00:34 | Link to Comment TruthInSunshine
TruthInSunshine's picture

This guy gets it.

Commodities are vastly overpriced.

Bernanke's pushing on a string and some other factors he references has given them temporary support and the means to ramp up over the past 20 months.

Wed, 01/26/2011 - 00:55 | Link to Comment rocker
rocker's picture

I once heard this rumor. The markets can remain irrational longer than you can remain solvent.  In this case, don't be short, I thinks.  Yup !!!

Wed, 01/26/2011 - 00:41 | Link to Comment Turd Ferguson
Turd Ferguson's picture

On page 18, it states that gold will top between April and June of this year.

On page 19, it states that a prolonged disconnection between gold and the $ would mark the beginning of the end of the current monetary architecture.

Then, this also states that the demand destruction of global slowdown will cause up to -50% moves in most commodities over the next 24 months?

It's late, I'm tired and I'm having trouble squaring all of these statements.

How, exactly, is a global slowdown dollar positive? And if the dollar doesn't improve, the disconnection between gold and the $ will "prolong" even longer. And if that happens, these folks believe that its the beginning of the end of the current dollar-based monetary architecture. And how is the end of the current monetary architecture negative for dollar-denominated commodities? So negative, in fact, that they will experience greater than 50% declines?

Maybe I'm missing something but this all smells like simple, sell-side hogwash.

Wed, 01/26/2011 - 00:45 | Link to Comment TruthInSunshine
TruthInSunshine's picture

I like you, Turd, and think you're sharp on T/A.

Fundamentals typically ultimately catch up with commodities, and beat their ass.

Demand destruction, supply/demand equilibrium, and so forth...

Do you really see true demand supporting the price levels of almost all commodities?

*I do realize you're speaking of the section on gold, specifically. On that point, I would be afraid that the criminals in control of the exchanges have total and free license to manipulate away, and that's what I'd be afraid of over the short and intermediate term.

Wed, 01/26/2011 - 00:59 | Link to Comment Turd Ferguson
Turd Ferguson's picture

Thanks, truth.

I guess my point long the commodity is denominated in dollars and the supply of said commodity is not increasing, then Econ 101 teaches us that more dollars chasing a static supply creates an increased price for the commodity.

But what the fuck do I know? Take a look at my yellow hat, for pete's sake.


Wed, 01/26/2011 - 01:09 | Link to Comment dwdollar
dwdollar's picture

That's fucking crazy.  Sounds like voodoo economics to me.


Wed, 01/26/2011 - 05:46 | Link to Comment Jendrzejczyk
Jendrzejczyk's picture

"We keep our strategic long position the strategic USD 3000/ounce target we fixed on gold in 2002 remains our minimum target…"

That one sentence should clear up any confusion your hat may be causing (thanks for your blog btw).

Wed, 01/26/2011 - 01:02 | Link to Comment Spalding_Smailes
Spalding_Smailes's picture



I have been posting on this for 3 months. China slowdown plus the rate hikes ( global ) w/china will blowtorch commodities. Pettis has talked about the china slowdown for 8 months now, Nomura is out, Rogers is out ...

Chanos talks about the looming crash in commodities ... 70% GDP is in construction now, yikes !





Wed, 01/26/2011 - 01:00 | Link to Comment bob_dabolina
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I don't want to speak for them but I surmise that a global slowdown will be dollar positive because the dollar is still the reserve currency, as such, the ultimate safe have. I also assume that they are saying when people sell stocks/commodities, they will buy bonds and be in cash.

However, I disagree because the Fed will never allow assets to fall in value. They would much rather print money which is dollar negative. Did you see what happened to IBM today? And than there is the Municipal problem which I beleive will force more QE. If there is a massive pull back of some 50% I think it would be shortlived.

To be honest, I don't really know anymore. They have this fuckin' system so complicated and are pulling on so many levers its hard to figure it out anymore. 

Wed, 01/26/2011 - 01:46 | Link to Comment TruthInSunshine
TruthInSunshine's picture

It may not be what Bernake thinks he can do or wants to do (not letting prices on commodities, or anything else for that matter, fall), but what he can't do (preventing such).

As Spalding stated above, a high % of commodities are being used as inputs for construction and infrastructure projects, which will subject them to serious slack under the right conditions in 2011.


Wed, 01/26/2011 - 02:41 | Link to Comment dryam
dryam's picture

The world economy is in the process of contracting.  With recessions/depresssions everything drops in price relative to money.  The problem is that the value of fiat currency is anything but fixed with all of the money printing.  The PM's are being viewed as money & a store of value.  As long as there is faith in fiat currency, particularly the USD, then a worldwide slowdown will cause the USD to strengthen (even relative to gold).  When that faith starts to falter, gold will strengthen and take over that role, but in a much more dramatic way because a very large amount of USD's will be trying to get into a very finite amount of gold.


The big question is how China is going to weather the short term storm of the misallocation of it's resources.  It just might be able to pull it off without much of a problem, or it might have a few years of pain yet to endure, but they are in good position to retool.


As for the U.S., we all know it's a depression.  That means collapsing prices are inevitable.  The Bernank will continue fighting tooth & nail for that not to happen, but how is that not inevitable?  As things slowdown the USD will strengthen until the increased money printing takes it's toll and it hits a tipping point when there's a collective sentiment of no faith in the USD.  That's when gold takes off.


As for non-PM commodities, they have gone up b/c of all of the money printing.  Somehow the USD has remained relatively strong.  There's going to be quite a bit of pressure on those commodities to come down in value the more the economy contracts.


My very amateurish view on commodities is that they fit in 3 basic categories...1) the things that are essential for life such as wheat, rice, etc. 2) the things that aren't quite as necessary for life such as steel (2 families can always live in one home)  3) and the PM's


The essential commodities are probably good investments for a variety of reasons, plus they are good inflation hedges.  The PM's are unique in that they are good inflation & *deflation* hedges (gold more so than silver).  The non-essential commodities are the ones that are setup for a big fall.


Investing in a contracting world is something I haven't been able to comprehend.  I'm starting to think the ideal portfolio is a mix of PM's, essential commodities, high dividend paying staple equities deonominated in a non-USD currency, and a small basket of the strongest currencies......anyone know which ones?.....CAD?  Taiwan dollar?  Singapore?  Swiss Franc?


Wed, 01/26/2011 - 09:27 | Link to Comment SamuelMaverick
SamuelMaverick's picture

nice post dryam!

Wed, 01/26/2011 - 01:01 | Link to Comment bob_dabolina
bob_dabolina's picture

I think Federal Reserve Notes are undervalued. There is this issue of supply that I think is tight and will only get tighter. The Fed may need to print FRNS soon and create a more accomodative monetary policy to assuage the fears of the market.


Wed, 01/26/2011 - 01:48 | Link to Comment TruthInSunshine
TruthInSunshine's picture

I realize you're being sarcastic, and I agree Bernanke is an asshole, but in reality, physical, accessible FNRs are in short supply, at least everywhere I see.

While the monetary base may have risen, it seems to be locked up, inaccessible, and generally in the form of targeted infusions, and not widely in circulation.

In the interim, general credit is difficult to tap, and the demand for it is soft.

Wed, 01/26/2011 - 02:09 | Link to Comment Duffminster
Duffminster's picture

while its true that the money is locked up in terms of making it into the broader economy; the Fed Primary dealer bond churn and all the supplemental liquidity / POMO credit that remains locked in the Fed / Primary dealer cycle is finding its home in equities and commodities where there is non debt degraded value.  This is a form of monetary velocity and acceleration.

Regardless of the broader economic and textbook definitions of velocity or the lack thereof within the broader economy, there are sub harmonics of relatively un-metered velocities that act through the back channels and hf and churn and burn operations that create internal resistance and entropy to the underlying currencies. 

Debt is much like resistance and somewhat like inductance in an RCL circuit and while net result of one AC cycle may result in a net movement of zero in actual electron displacement, inductance and energy conversion/entropy takes place as result of those operations in the realm of fiduciary media.

Bottom line is that as the realization dawns on the greater investing world that the US and combined EU debt can never be repaid at the current valuations of the respective fiat currencies relative to real goods, some of the concepts of currency valuations will be overridden by this larger macro reality of debt degradation as a function of sovereign default risk, whether through out right bond defaults or planned currency obsolescence via controlled burn QE Zimbabwe economic principles.  

This is why I think that real hard cold cash like gold and silver will remain hot commodities for quite some time and like QE probably to infinity and beyond.


Wed, 01/26/2011 - 02:27 | Link to Comment dryam
dryam's picture

What about the 1 billion $100 bills that were recently misprinted?  That's a lot of cash in one print job.

Wed, 01/26/2011 - 04:19 | Link to Comment ak_khanna
ak_khanna's picture

The only thing driving up commodity prices are speculator­s armed with cheap money and super fast computers. This is causing a havoc in the lives of rest of the population and pushing them towards poverty as they can no longer afford the basic necessitie­s of life.

Regulators are too slow to react and take ages to identify and take measures to solve the problems.

Total ban on speculatio­n is strictly required all over the world to bring relief to the common man.


Wed, 01/26/2011 - 07:10 | Link to Comment KickIce
KickIce's picture

Take a large geopolitical event, and then lets see what happens to fiat currency.  Especially in light that trust in governments is at an all time low.

The Chinese and Ruskies are investing in commodities, Ben and Timmy are still trying to play the banker's game.  Who do you think is more practical?

A person that's starving to death might think a $20 big mac is a bargain.

Wed, 01/26/2011 - 08:37 | Link to Comment ColonelCooper
ColonelCooper's picture

Yeah well.. As of yesterday, I decided that we (U.S.) are officially the dumbests sons of bitches of the face of the Earth. (present company excluded)  From top to bottom, our President is little more than a blithering idiot who gets dizzy from shaking his head back and forth between teleprompters, and he sits court over a bunch of fat, lazy, Taco Bell eating, non-science learning (anybody see that one yesterday?), American Idol watching sons of bitches. 

We deserve what we get.  Enjoy your famine.

Wed, 01/26/2011 - 09:23 | Link to Comment Downtoolong
Downtoolong's picture

The introduction of physically-based ETFs


There seems to be a race on in our economy between the number of apps for an Iphone and the number of ETF’s for every possible investment idea imaginable.

Wed, 01/26/2011 - 10:58 | Link to Comment Johnny Lawrence
Johnny Lawrence's picture

This is why I don't buy the inflation argument yet.  When the stock market crashes, so too will commodities.  Look at what happened in Japan.  Bouts of inflation, but a general trend of deflation.  History rhymes.

We'll see what happens with precious metals.  I'm invested in gold & silver because of the ongoing currency war between countries and instability in our global financial system.  I'm not looking to sugar and livestock for those reasons.

Wed, 01/26/2011 - 19:06 | Link to Comment attst487
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Strike first, strike hard, no mercy, sir!

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