Tuesday’s sun shone brighter on commodities for a change, as a dip in the US dollar and several other constructive background factors conspired to lift the complex towards higher value ground. The resurfacing of the “extended period” language in the comments made late on Monday by St. Louis Fed President Bullard emboldened the players whose continued profiteering in commodities depends precisely on such an “extension” of the near-zero interest rate environment brought to them courtesy of the US central bank. They hope to see that situation persist even after the expiration of QE2 in five weeks’ time.
Mr. Bullard also remarked that the Fed ought to widen the scope of its inflation-gauging to include additional components beyond just the so-called “core” metrics. Finally, the St. Louis Fed chief also warned that commodity prices cannot continue to increase “forever” albeit he was not so sure about the energy supply/demand paradigm not tilting into a larger deficit as we go forward. Picking up on that theme, both Goldman Sachs and Morgan Stanley hiked their crude oil price forecasts by more than 20% while also giving copper and zinc a favorable nod in coming months.
Some of this GS and MS-originated optimism flies in the face of recent CFTC data that revealed a sizeable reduction (11%) in the net-long positions by money managers in commodity futures. In fact, such positions were at their lowest since last July as of May 17. As regards net-long positions in precious metals as of the same reporting period, the CFTC data also shows a shrinking in their size. Nearly 15,000 long positions in gold were cut by managed money traders and the size of the net-long positions in silver fell to its lowest level in two years.
The recent spike in the price of a whole host of commodities appears all the more difficult to account for when one takes into account the lack of certain events that would seriously disrupt oil production (yes, Mr. Gaddafi and his protracted departure from rule are largely irrelevant to global oil flows) or the output for agricultural commodities. The US Department of Agriculture in fact has offered a bullish forecast for wheat; but only in terms of its production, which appears set to rise by 22 million tonnes to 670 million in the current year.
As with other commodities (see silver, for example), the underlying supply/demand fundamentals fail to explain swings on the order of double-digits in the price of one or another item that makes up the complex. The only rational explanation for such a phenomenon continues to be the vast pool of liquidity still present in the global market bathtub. Thus, notwithstanding the near-8% correction seen this month in the Thomson Reuters-Jeffries Commodities Index, the metric shows a roughly 30% gains since August of last year.
However, perceptions that central banks (at least certain ones) have begun the process of draining the kiddy pool of liquidity in which a very good time has been had by one and all commodity players continue to offer cause for concern. The euro this morning went in the opposite direction of its former course (one that was a result of recently resurfaced debt crisis apprehensions) and it rose as anticipation that the ECB will once again hike interest rates in June took over sentiment and dominated trading patterns.