Gold, silver reverse losses as dollar drops

Commodities staged a modest comeback late on Thursday and into Friday morning as a slightly weaker US dollar drew a few courageous bargain hunters into the ring looking for an opportunity for a short-term buck-making opportunity. It has been two weeks now since the sector has recorded certain epic valuations that were followed by a pattern of price action that best resembles the happenings at a bungee-jumping festival. And thus, we come to Friday the 13th, hoping we do not get the next installment of the movie playing out on the world’s financial screens.

During this period of tumult, small retail investors have learned some difficult lessons (or, did they?) about timing, emotion, and market behavior. Some are now wiser in the aftermath of recent events, but also poorer at the same time. Others, on the other hand, continue to sit things out on the sidelines, as evidenced by the tens of trillions of dollars (perhaps as many as 63) that are ‘parked’ around the world, and are not participating in markets that are best described as an exercise in sword-swallowing.

“The environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So, now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which…means having substantial cash reserves around a base of high-quality blue chips and emerging-market equities” is the advice currently on offer from Boston-based GMO head Mr. Jeremy Grantham. Albeit the financial guru acknowledges that he might be a tad too “early” on such a caution-induced asset reshuffle, he feels that it might be a better approach that having to later be sorry.

Sharply rising commodities prices have only reinforced Mr. Grantham’s cautious views. Even though crude oil and precious metals in particular have given up some sizeable ground over the past fortnight, the broader trend towards higher; prices still continues to unnerve him. Thus, Mr. Grantham advises, sell your riskiest investments, and do so now, even before the trend turns.

Perhaps the “best” (read: telling) headline on offer this morning was the one that the Wall Street Journal carried on the topic of black gold. “Crude Rises On Weaker Dollar; Fundamentals Still Weak.” If that does not aptly describe the orgy of commodity speculation that arose in the wake of last fall’s “gift” of QE2 to the speculative crowd, well, nothing really does.”Fundamentals? We don’t need no stinkin’ fundamentals!” has been the one and only slogan in this space and the commodity vigilantes have been putting the Fed’s money to “work” ever since it became available (at nearly no cost).

As a result, they got to a point where their actions are now threatening to either derail the recovery the Fed tried to stimulate with its asset-purchase program, or are motivating the Fed to begin to exit from accommodation due to the speed with which inflation is potentially approaching US shores. In a sense, the commodity specs have sowed the seeds of their own “destruction” with the aggressive betting they undertook with “OPM” (other people’s money).

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