Last week a number of commodity markets were lifted by a resurgence of fund buying that seemed to be coming from long-term investors. With several commodity fund managers reallocating investment Dollars from US oil markets to foreign energy markets and also reducing their investment in some commodities and raising their allocations in others, it would certainly appear as if the “funds” have begun to maneuver around the anticipated regulatory changes. With some managers also moving into commodities that previously hadn’t seen much fund activity, it would appear that the bullish attitude is spreading towards all commodities. Given the persistent rise in inflationary expectations, we suspect that demand for physical commodities will begin to climb the way that demand for derivative instruments has.
With the nature of the financial crisis forcing many key central bankers to promise to “leave interest rates at extraordinarily low levels for a long period of time,” those who are supposed to control inflation seem to be doing everything they can to create or foster it. Just to add to the upward bias in commodity prices, the markets are also likely to face an ongoing and perhaps historical slide in the US Dollar.
In addition to the US President at the UN seemingly calling for a new world economic order (that would seem to mean old leaders becoming followers), the markets also recently saw rumors that some Gulf oil states were working toward oil contracts that were priced in a basket of currencies instead of in Dollars! Even though those rumors were denied, it is clear that in the past Russia, Iran and even the Euro zone have in the past pushed for a diversification in the currency pricing of oil.
In the end, promises by the US Federal Reserve to leave interest rates at low levels coupled with exploding US Government budget deficits look to keep up the pressure on the US Dollar. Already markets like crude oil, gold and cocoa are seeing a tremendous amount of support from the sagging Dollar, but it is also clear that many traders and investors are becoming more interested in piling into commodity markets that would be expected to appreciate in the face of developing inflation.
Until last week’s the freeze threat for portions of the US growing area, there were few supply-side concerns supporting the commodity markets. We had already traversed through the brunt of the hurricane season without a serious threat against the oil sector. As a result, many commodity markets have little in the way of uncertainty or inflation factored into their prices.
At the depth of the recession, we maintained that many commodity markets were capable of sustained recovery rallies because of their ability to govern their supply, but in the wake of surging investment demand or as they call it in the gold market, “implied demand,” the amount of available commodity supply could tighten with only a modest improvement in the economy. (We have to wonder what commodity prices would be doing if the outlook for the economy was better.) In the mean time, we think that a host of “small” markets like cocoa, cotton, zinc, palladium and orange juice will, over the coming weeks, catch an anticipatory inflationary run, but we also think inflation will be a bullish bug that can be caught by almost every commodity market.