The entire market is getting a shellacking this week.
But the resource sector is taking the brunt of the storm. The Metals and Mining index is down around 6% so far this week. In just a few sessions it is back to where we were in January. As the saying goes'the market goes up the stairs and down the elevator'.
The reason the resource sector is pulling back across the board is massive falls in commodity prices across the board. Take a look at the chart below to see what I mean. Copper and tin are both off by more than 6% in a week.
This is mostly down to the ongoing chaos in the MENA (Middle East and North Africa), which is causing sustained high oil prices. Brent is up around $115 yet again this week. Investors are getting seriously worried that the oil price could rise higher and cripple the global economic recovery which is still just getting off the ground. This means lower demand for commodities, which is why prices are falling.
High oil prices are direct route to inflation across the board. So investors are piling into precious metals as insurance as well as buying it as a risk trade. As a result, gold and silver price rises have been spectacular. Silver's performance has been something else altogether, but more on this in a moment.
Oil still up, so precious metals up and base metals DOWN
Source: ANZ commodity research
The steep fall in base metals prices is stinging right now. But take a step back and put it in context. The chart below shows the London Metals Index for the last twelve months. The recent drop suddenly doesn't seem so bad. We have had a ludicrously good run with metals prices for the last nine months. So this well overdue pullback has felt like a bit of a rude awakening.
LME Metals Index chart - current fall is just the latest dip
Source: Bloomberg
Don't get me wrong, I'm not being complacent.
The oil price is a real risk as I've been saying for a few weeks now. We also have the Euro debt crisis story moving back into the spotlight with Portugal looking like the next shoe to drop. But I am saying that the commodity price falls we are seeing right now are not the end of the world.
Anyway, there is also plenty to support higher metals prices right now.
The USD Index for starters: it's at 76.7 and is falling like the washed-up rock-star it is. Our technical man reckons it doesn't have much support below 74, and that below this, things could get really ugly for the dollar. This is great for the price of real assets such as commodities: and therefore resource stocks.
US Dollar Index responding to logic and heading south
Source: Bloomberg
On another positive note for commodities, we also have China reconfirming the 8% target rate for this year.
Furthermore, China's next five-year plan (2011-2015) targets the slower, but still astronomically high growth rate of 7%. I know it doesn't sounds like much. But it IS fast. Five years of 7% compounds out to 40.3% growth over that five year period.
Will this actually happen, or will China implode instead? Well, I've been watching the actual coal-face of data: the Chinese commodity import numbers. Until these show any sign of slowing down, I won't be feeling too worried.
Where has all the silver gone?
I mentioned last week that a local bullion dealer was rationing sales due to difficulties accessing physical silver. This week another bullion dealer that I speak to has come up against limitations as well.
A few weeks ago, he said 'I can get as much silver as clients need. One hundred kilos is not a problem'. This week that changed to 'There's no silver left out there!' I've even looked at the bullion available via on-line auction sites, and what little is left selling on there is at a massive premium to spot price.
With a physical shortage now very real and present in the market, silver is getting that big re-rating that I was talking about. The price has gone vertical in the last few weeks. It's important to remember that a 6% change in the silver price each week is not normal!
But this is not a normal market.
The dynamics of its market are fundamentally changing. After getting kicked out of the photography world, the industrial uses in medical and electronic industries are growing very fast. This now takes well over half of the world's silver.
Then investment demand has exploded, and seems to be now coming up against a wall as there is not much silver left floating around (mental note - You should buy some more while you still can).
Add to this all the silver short positions put on by the institutional players getting smashed right now causing a short squeeze that could go on for quite a while. This is explained beautifully in this Zero Hedge article.
The result is one of the most extreme looking commodity charts you're ever likely to see.
Silver chart - gone parabolic and plenty left in the tank
Source: Goldprice
This week I had a coffee with a reader called John, who paid us a pleasant surprise visit. A question that came up was 'how do I buy precious metals'? Well the ETFs are the easiest and quickest way (ETPMAG is the one for silver, and GOLD is the one for gold). The silver ETF we recommended is a good option and is now up 125% from the recommendation.
If you want to actually hold your metal, and feel like Goldfinger, then you need to buy the stuff from a dealer. Perth Mint is just a phone-call away.
Gold price holding its ground - next tip a gold stock
It's about time for a gold tip isn't it?
The geopolitical risk in North Africa, the threat of higher oil prices, and Euro insolvency are all adding to gold's investment demand. We still have ever stronger buying from China and India, as well as the fall of the dollar happening before our eyes.
All are good reasons for gold to keep heading up.
Gold still flying
Source: goldprice
We are seeing gold remonetising at municipal level. The State of Utah is officially considering the use of gold and silver coins in financial transactions - even to pay taxes. A dozen more states are considering similar bills.
This is a story worth following. The re-emergence of gold and silver as legal tender at state level could be the start of something long since missing from the country: Sound money.
Bring it on.
Price of chocolate to jump...
I mentioned in the newsletter that food prices are heading up. Well unfortunately, that means that chocolate too. Particularly as most of the world's cocoa comes from the Ivory Coast, where things there are looking a bit uncertain.
Cocoa traders (yes, some people do that for a living) are facing a massive shortage until things are clearer in the Ivory Coast. Right now, half a million tonnes of cocoa beans have been confiscated, which means that chocolate brownies are about to start getting a lot more expensive.
Dammit.
Cocoa price on the up
Source: trading economics
ASX could be quiet on Monday
It's Labour Day in VIC, TAS, ACT and SA on Monday, so don't expect the market to be going full flow. I've got a few much needed days-off to recharge the batteries, but will be writing to you again next Friday.
In the meantime, please let me know about any hot looking gold stocks that you reckon the market has overlooked. They should have a market cap of more than $80 million though.
Source comes from a subscription I pay for- ASX codes have been deliberately removed as it will be unfair to everybody else buying into these stocks at lower prices. Thanks for understanding.
To sign up: https://web-purchases.com/osifwdsell/E9AOL751/location.html
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