What’s up with Goldman Sachs’ commodity call?!

Smart Money Europe's picture

Yesterday, Goldman Sachs decided to call the top in commodities by
dumping its profitable positionin the CCCP basket. The man who tried to call a top, Jeffrey Currie, chooses to lock-in a 25-percent-profit on the
trade he opened in December 2010. He thinks the near term risks have
become too excessive, especially with the recent rally in oil prices.

Alphaville reports:

Although potential contagion risk in the Middle East and
North Africa (MENA) remains elevated and has pushed prices above
$125/bbl, at these price levels the risks are becoming more symmetric,
which shifts the risk/reward of being long oil. Not only are there now
nascent signs of oil demand destruction in the United States (see April
5 Energy Weekly), but also record speculative length in the oil
market, elections in Nigeria and a potential cease-fire in Libya that
has begun to offset some of the upside risk owing to contagion, leaving
price risk more neutral at current levels.

As a side effect, Currie also fears consequences in the metals arena:

We still see significant upside in soybean prices, but
believe that copper and platinum will face near-term headwinds as
higher oil prices potentially translate into a negative demand shock
for the metals and as these commodities are exposed to supply chain
problems resulting from the earthquakes in Japan. This is particularly
the case for platinum given its large exposure to global automobile
production. Copper also remains vulnerable to slowing observed demand
as high prices and tight credit motivate tight inventory management
from key consumer China, which tempers the inventory draw we had
expected and the risk of price spikes. As result, we are also closing
our long copper and platinum trades, but even in these commodities the
structural supply-side story remains intact, and we would look for new
entry points to establish new longs.

At a first glance, these arguments seem very logical: demand destruction as a result of rising costs.

But why call the top in commodities now? Like we reported last week, we aren’t seeing large optimisme in precious metals,
and to a wider extend commodities. Very few market participants are
ready to really believe in this long term secular bull market.

In fact, as we look at it — from a Big Picture perspective — commodities have just begun to outperform.

Take oil for instance… compared to stocks, oil just started to ‘let loose’!

The Dow Jones / Oil ratio only started to tumble in the recent weeks
to 115x, while the ratio was hovering around the 130 mark for the last 2
years. In terms of purchasing power, oil never really got expensive in
the last 2 years, even with prices running from $60 up to +$100 per
barrel over the same period.

With the recent downturn of the Dow/Oil ratio, there’s even more room
below. When oil prices went ballistic in ’08, with prices reaching
almost $150 per barrel, the ratio dropped below 80x. At the current
position of the Dow at 12,260 index points, that would lead us to oil
prices trading above $150: a new all-time high!

Of course, one could argue that the Dow Jones could start to tumble,
but even in that scenario, we don’t see oil prices retreat very much

By the way, the Dow/Oil ratio could drop much further than 80x in the
current secular bull cycle. The ratio submerged to 20x back at the end
of the 70′s and early 80′s, when the Dow Jones stood at 800 and oil
topped $40.

So
we don’t think oil is getting very expensive compared to other asset
classes like stocks. In fact, the commodity complex (CRB) as a whole has
become cheap compared to stocks over the last few years.

 

As can be seen in the chart above, the Dow Jones / CRB ratio has only
begun to drop in the past half year. At the current rate of 34x,
commodities are still cheap compared to stocks in terms of purchasing
power, as the medium bandwidth hovers around 32x.

If we take into account other segments within the commodity complex,
like precious metals, we also notice that there is  more room left on
the upside for prices, with downside risks rather limited.

There’s nothing wrong with taking a hefty profit like the Goldman
CCCP trade, but keep in mind that trading in and out of positions during
a secular bull market is almost an art. Many traders miss the bottom
when they went to trade back in, which leaves you chasing a position or
bailing out of the trade.

Our advice: if you want to take some profits, don’t trade out of your
whole position(s) in commodities, but rather sell a part (half), so you
stay involved with the bull. If things get nasty on the
downside, you can always start to load up again when the potential
sell-off reaches a climax.

>>> www.smartmoney.eu

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plata pura's picture

A GSR above parity is obscene and unsustainable; the Goldman Sachs call was as absurd and called upon by DOD as a shot across the bow to German and Russian financial ugly bumpin. Whilst all eyes on hop sing having little joe bring wood for laundry the ivans and krauts be merging next generation tech and natural resources for what fuels growth and prosperity (energy). The jekyll isle cartel wants; needs the common, middling and gentry on the same checker board whilst they be all up conniving in three dimensional chess and shit.   

dearth vader's picture

Lower oil prices? Duh.

Per tomorrow, April 14, gas (unleaded) price in Holland will be raised to 1.75 euro/liter.

At today's FX rate, that equals U$9.56 per gallon.

paint it red call it hell's picture

lets just say the PM's do take a dump. who thinks the miners will follow? could it be the hedge trade finally allows the revalue of miners on a declining metals price?

AldousHuxley's picture

The house does not want you to buy & hold (invest). The house want you to buy & sell (trade). For wall st. volatility generates profits.

Buffett trick: buy then hold until your death. Never pay cap gains tax, never pay trading fees, don't care about analysts opinions....just hold then give it to a non-profit controlled by your children.

 

 

The Navigator's picture

Goldman Sachs = casino rigger

Goldman Sachs talk = BULLSHIT

topcallingtroll's picture

Ok i agree. I capitulate.

I post all my trades unlike another robotroll i know

Bought back into vde at 111.55

Gdxj 40.20

Ewz 76.70 77.60? Too many numbers to remember but whatever it is it hasnt moved today. Its within a.few pennies of its current price. Totally dead

I have no shame. Bought 200 shares of BIDU at 145.34. These are averages and i round up the.goldman subpenny.hft scalping. Made an average of 4 percent in this horrible two day bear market. D

Documented buying cyh at 25 ish. Think 25.65 and sold early for a nice 15 percent pop in one day.....THANKS.TYLER! Ok.all you other robotrolls post some trades because i think you are a big fake.

Also documented a while back buying a box of eagles when silver was 31. Ok all you cocksucking braggerts holding ten baggers. Document your trades in real time.

Im talking to you, robotroll

Sudden Debt's picture

SAY MULTIPLE SILVER BREAKOUT MOMENTS BITCHEZ!

 

http://www.marketoracle.co.uk/images/2011/Apr/silver-12-3.gif

 

Inflation is already everywhere. Excessive central bank liquidity and loose monetary policies since 2008/2009 have unleashed global inflationary pressures that cannot easily be controlled.

Just as inflation drove gold to a high in 1980, it will do so again today, three decades after Nixon literally pulled the gold out from under the world’s monetary foundation. Inflation is now about to finish what Nixon started, the end of fiat money is in sight.

Increasingly consumed by inflation, today’s paper currencies will worthlessly inflate ad infinitum and disappear like cotton candy into monetary oblivion like all fiat currencies. This time is no different. Gold and silver will again soar and, as in the 1970s, a short squeeze will again be a factor.

Unlike the 1970s, however, it will not be silver that is squeezed. This time it will be the bullion banks who have colluded with central banks to keep prices of gold and silver low; for as silver and gold rise, at a certain point the bullion banks will be forced to cover their enormous short positions (see below) driving gold and silver higher.

Savonarola's picture

Liar's Poker  -- page 110.

cswjr's picture

They're just looking out for the little people, letting us get a better entry into Ag/Au.  Or maybe they're looking out for a brotha, letting Blythe cover her shorts.  They're most certainly not trying to make money for their prop trading desk.

66Sexy's picture

Certainly supports todays action. Silver up on the news= short covering into the price drops.

 

Same old bullshit from Goldman: how can we expect them to tell us the win.... then they can't siphon our nickles and dimes. 

Mercury's picture

Hey, at least an actionable Goldman call has resulted in actual capital gains for once...

66Sexy's picture

Trying to recall which came first... the recent Goldman call on commodities or that 1 mil put on SLV...

Perhaps someone is speculating Goldman is somehow a legitimate authority., or trying to make us think they are? To protect the perception of the dollar by driving down commodities?

Mercury's picture

I'm referring to their call in/around January to buy the basket they are now saying to sell.

Global Hunter's picture

Your advice seems like good advice.  It would appear to be that the big lads are trying to set up the stage for QE3, "look there's no real commodity inflation". Headfake.

66Sexy's picture

QUOTE: "We still see significant upside in soybean prices, but believe that copper and platinum will face near-term headwinds as higher oil prices potentially translate into a negative demand shock for the metals.."

 

Platinum hit new highs in 2008 while oil was pushing 150. Higher oil prices means suppressed production and tighter supplies, while alternative energy experimentation takes center stage.. enter pt and pd.