Posted on 05/15/2006 8:17:38 PM PDT by sully777
NEW YORK (Reuters) - Oil and metals prices may extend their sudden slide as economic worries trigger a speculative rout, but the record rally in energy and commodities isn't dead yet, experts said.
Crude and metals prices have smashed records this year as hedge funds seeking to cash in on their searing returns poured billions of dollars into the sectors, and Monday's setback signals a correction, not a meltdown.
Crude futures, which fell 3.7 percent to $69.41 a barrel on Monday, could drop as low as $60 a barrel, according to hedge fund managers and analysts, but a rebound is likely as global production capacity constraints resurface.
Gold and copper prices, which also fell more than 3 percent, may take a corrective hit, but long-term Asian demand will eventually help push prices higher, analysts said.
Oil plummeted from record highs above $75 a barrel last month after the International Energy Agency cut its global oil demand growth forecast and a University of Michigan survey showed high gasoline prices pushing U.S. consumer optimism to the lowest point since Hurricane Katrina.
The weaker demand forecast may push hedge funds, which have increased their exposure to the energy sector as prices soared in recent years, to sell off.
"You had to slow it down. We view this as a natural short-term correction," said Erik Simpson, managing director of Vantage Advisors, which runs the Vantage Energy Hedge Fund.
"I think that while it would be very correct and natural to have a move down another 10-15 percent to bring you down to $60, overall longer-term markets should remain well-supported."
Constraints in global refining and production capacity -- which helped push up prices to record levels last month -- are not likely to ease soon and mean the sharp sell-off in oil prices may be short-lived.
"People are putting money in the energy space because of capacity constraints, they believe that Asia is growing fast and consuming oil and a lot of other commodities at a healthy rate and it's going to take some time for capacity constraints to be addressed," said Mike Wittner, head of energy market research for Calyon Corporate and Investment Bank.
Worries about crude shipments from key suppliers like Nigeria, plagued by civil strife, and Iran, stuck in a deadlock with the West over its nuclear ambitions, have also helped support high-flying crude prices.
"At some point in the future, it is going to be a huge buying opportunity," Wittner added.
METALS TANK
Slumping metals prices are setting the ground for the next trading rally, analysts said.
"When you get the kind of activity that gold, silver and copper have been exhibiting over the last couple of weeks, it's just unsustainable," said Adam Sarhan, who heads The Sarhan Analysis, a commentary on financial markets.
July copper sank 11.75 cents, or 3 percent, to settle $3.7465 a lb. It hit a life-of-contract high of $4.04 last week.
London Metal Exchange's three-months copper settled $270 lower at $8,190 a tone.
Sarhan said selling pressure could push gold down to as low as $650 an ounce, the starting point of an extended rally that began two months ago.
"We will move our stop to $634.32," he said. "So far, it's a healthy bull market. Nothing has changed. It's just a normal correction within a longer term bull market."
Gold hit a 26-year high of $730 on Friday. But on Monday, gold for June delivery on the New York Mercantile Exchange settled down $26.80, or 3.8 percent, at $685.00 an ounce.
Spot gold was trading at $680.60/681.60, against late Friday's $714.10/$715.10.
A Wall Street commodities broker put the downside for gold at $662 an ounce and copper at $3.34 a lb, based on 20-day moving averages.
"Part of the sell-off now could be due to portfolio managers trying to balance things off, especially if they're getting squeezed on the equities front," the broker said. "There could also be counterplays coming from the fixed income side.
I hope every cheesy futures trader and speculator is contemplating throwing himself off a ledge, and that a panic in oil bankrupts hundreds of them.
"The weaker demand forecast may push hedge funds"
It was probably the hedge funds in the first place that started jumping out of precious metals. Others have followed suit. But the correction is needed and healthy for gold and gold stocks. Buy on the dips.
I've 15-16 positions on right now and exactly none of them are in any of the parabolic or near-parabolic mkts.
Those markets are for gamblers, not traders, at this time.
No need to fear about bankrupting some number of traders. This has occurred in spades in EVERY parabolic mkt throughout history.
There comes a time to trade in former parabolic mkts, and I have told everyone on FR exactly when that is to within 1 day, and can and will say it again at some point...but it ain't yet for any of the current suspects.
BTW, crude has never gone parabolic this year. Unleaded has been close. SI and HG were, for a few days. Nickel unquestionably is. However, as Mr. Berra once famously noted: ''It ain't over 'til it's over''.
We'll see one or possibly several parabolic mkts this year, bar a worldwide recession.
Whether we do see one/some, and how many we see, depend exactly and only on the level of stupidity evinced by the political class.
I've got a question - what would you do if you owned gold, emerging markets and International funds? Is it time to dump it all for some sweet little money market?
Considering the stellar rise of the PM's and commodities lately, we expected any correction to be sharp...
and short.
Can't wait to see gas prices follow, but I'm not holding my breath.
He must be talking close-to-close. Dropping from $730 to $685 is more like 6.1%.
A few thoughts, pls take them for what they're worth, no more. I am and have been rather heavily involved in shares of mineral royalty trusts for some years, but this game MAY be ending, it's not clear to me. These are just like REITs, in one sense, in that they are required by statute to pay out as dividends a very high %age of their net cash flow.
Because I also believe that energy will become more expensive in dollar pricing, I've tended to buy Canadian royalty trusts, but there are some perfectly fine American ones, too, traded right on NYSE, that I've owned from time to time.
''Emerging'' mkts? Pls tell me what that odd little adjective actually means in this context, and I'll happily give you an answer. Sorry, but my understanding of that term may be sharply different from your understanding.
Gold? Nothing wrong with gold, but one always must be careful in dealing in ANY (pardon the shouting, pls) highly emotional mkt. Do I believe that the price of gold in dollars will rise over time? Yes, I do. Do I believe that the swings in the price of gold will likely be very violent, over time? Yes, I do.
Do I trade in mkts that have, seemingly obviously, potential violent swings? No, I don't, not any longer. Were I trading in gold, I absolutely guarantee you that I'd purchase reasonably scarce gold coins with a well-known numismatic value, but that's just my view.
The question about 'international' investments is a very timely one. One of two things will happen with USD: either someone will persuade the ChinComs to allow their currency to reach a mkt-clearing level in (say) a year's time, or someone will not. The ChinComs show no intention of letting renmimbi seek it's natural mkt-clearing level by floating it, so we'll have to see what happens here. I'm presently of the view that there is exactly no way that the ChinComs will do anything but keep to that extremely profitable foreign exchange policy they have enjoyed for some time. Let the winning trades run, eh? Sure -- you and I would do, too.
Net bottom line, here? I'd rather trade against USD than with it, at least for the remainder of the year. Foreign exchange seasonal tendencies of former years have been pretty uniformly followed this year, and I do hate to buck the trend (plain English: I don't).
Pls always remember that, historically, the Chinese have been well up on the list of the finest traders in the world. You could ask, for instance, Marco Polo, about that, eh? (g!)
One caveat about putting any foreign high-dividend security into any retirement account you might have: this USED TO BE a great game, but is no longer. The tax b*st*rds in Canada and Sweden and elsewhere USED TO leave the dividends being paid to qualified qualified US retirement accounts alone. This is no longer the case as of the first of this year.
Canada takes 15% separation tax right off the dividend BEFORE it's paid; didn't use to do so. Worse, in an IRA, a SEP/IRA, a Keogh, or a Roth, you and I can NOT claim this confiscation as 'Other Taxes Paid' on the 1040, as we (still, doubtless temporarily) can if we hold these shares in an ordinary account as opposed to a qualified retirement account.
Bottom line here is: in a qualified account holding Canadian shares, your net return is a flat 15% less than it would be otherwise. In an ordinary account, your return is 15% less on top, but that 15% can (and SHOULD, quite straightforwardly) be claimed as Other Taxes Paid on the 1040; quite a benefit -- the net, of course, depends on your tax bracket.
Sweden and Finland, btw, are worse: the tax treaties let them take 35% of dividends paid from you, with NO corresponding credit if the Swedish or Finnish shares are held in a retirement account.
Sorry for the digression. Money mkt? Don't be silly (not that you are, nor would I suggest so). It all depends on your circumstances, actually. If 4% gross, less taxes and inflation (which, by my calculations and p*ss on the CPI figures, is running at about 6.5% right now) suits you, then plop your funds into a money mkt, and good luck to you. I'll hazard a guess that this situation is probably not satisfactory. Money mkts are for idle funds, not investment capital (IMNNHO).
Now, this is probably poison to you, but nonetheless I'll mention it just the same. What I'm doing right now, this minute, is looking for low IV straddles in both stocks and futures. Yes, this is likely a style of trading that you have not undertaken. Yes, it involves gaining a bit of knowledge about -- gasp! -- options. And, yes, in a high-volatility environment as we now have, and I think will have for some little time in future, it's an exceptionally profitable strategy...and...heh heh heh...enjoys quite a few tax benefits, too. Section 1256 of that screwy IRS 'Code', otherwise known as the 'Rostenkowski Rule'.
My apologies to you. I tend to ramble a bit on my favourite subject of trading. Probably should restrict commentary to assorted articles (latest one in Option Trader Magazine, on-line, current issue, free signup, www.optiontradermag.com -- and no, I am not connected in any way with the publishers other than as an occasional author. They asked for an article, which I duly supplied for (not much) cash. That's OK; one of my favourite strategies (circumstances permitting), and the editors neatly eviscerated the heart of the strategy. Go figure (shrug).
Opportunity just abounds these days...REALLY. The trick, I think, if there is a trick to it, is to understand a bit more about whichever mkts you intend to trade, and -- knowing that a lot of mkts are going to become irrational at some point in future, as have the metals, exchange shares, energies, and particularly (haha) ''ethanol shares'' -- learn how to turn their irrationality into YOUR profit.
It's not all that difficult, truly.
Hope this is/has been of some use to you, and good trading always!
Never trust the dildoes of the financial 'press', even for something as simple as calculating a percentage change. The number of absolute howlers they publish is astonishing. Try this one, one of my favourites, from August 2001 by Peter A. McKay, a regular futures columnist in a number of publications, including WSJ. This is not an exact quote, because I haven't it in front of me, but I guarantee you on my life that it is substantively accurate.
''On the New York Board of Trade today, Coffee 'C' prices fell after an unanticipated warming trend in Brazil's coffee states allowed growers to clear the fields ahead of schedule for next year's crop.''
One small, little, tiny, itty-bitty problem with this piece of absolute rubbish: most coffee bushes, and certainly ALL the coffee in Brazil, are perennial, f'Heaven's sake! One doesn't ''clear the fields'' as one might in the case of corn or soybeans. The little bushes stay right where they are, year on year, barring frost or drought.
Don't get me started on the former (thank Goodness!) commentator for Barron's and FNN, Cheryl Strauss Einhorn, whom I routinely call 'Cheryl Strauss Tinhorn', who had (still has I daresay) both more teeth and fewer brains than the law allows.
"Following yesterday’s retail sales report a Bloomberg headline read, ‘S&P 500 Futures Gain on Retail Sales’. The speculation at the time (8:31 AM) was that a weaker than expected retail sales report was “rekindling optimism the Federal Reserve may soon end its string of interest-rate increases."
-snip-
"How long does it take for investor optimism relating to a Fed ‘pause’ to evolve into slow down fears? Apparently less than 1-hour: by the time the morning bell rang yesterday Marketwatch was claiming that the weaker than expected retail sales report was hurting stocks."
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Investor’s (emphasis mine) should keep in mind that during these uncertain times ‘news’ events can take on dual meanings (i.e. falling commodity prices could be briefly cheered by equity investors until it is unveiled that prices are dropping because the US economy is in recession).
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Investor's what? Investor's Business Daily? How in the world can any competent writer posit an adjective as the subject of a sentence? Sheesh. Obviously, this ding-dong intends Investors, but what price copy-editing, hmmm?
Banging the head, indeed!
;^)
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