Goldman Sachs may have done you a favor...
SO GOLDMAN SACHS has called time on the commodities bull market, writes Dan Denning in his Daily Reckoning Australia.
Goldman released a note overnight warning of "nascent signs of oil demand destruction". This is another way of saying that when oil costs over $100/barrel, people find a way to use less of it. The Goldman note coincided with a tactical retreat by commodity investors.
NYMEX crude was down another three per cent yesterday and is now down six per cent in the last two days. It joins oil, gold, and copper in the commodities complex in the correction phase. Some of the wire services report that because high oil prices damage global growth rates, you don’t need to hedge against inflation anymore with precious metals.
This is wrong.
These little corrections and pauses in the precious metals bull market are your chance to add to your positions on weakness instead of chasing strength. It’s hard to do emotionally, to buy something as it’s going down. It feels like you’re doing exactly the wrong thing.
But the important thing to remember here is how committed the US Federal Reserve is to keeping US interest rates low and US bond prices high. Just yesterday, Federal Reserve Board members Janet Yellen and William Dudley both took the airwaves to say the Fed doesn’t consider itself responsible for soaring commodity prices and won't be raising rates any time soon.
"These developments," Yellen said, referring to higher commodity prices, "seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery, and hence do not, in my view, warrant any substantial shift in the stance of monetary policy."
Translation: "Screw you even if you're paying more for food and fuel. We're keeping rates down for our banker friends whether you like or not. Suck eggs."
Of course it's true that demand destruction occurs when anything gets too expensive for people to buy. But with oil and energy, you also have to consider the effect of "supply destruction" on future oil prices. The world's largest proven oil reserves are located in a region that seems to be on the verge of redrawing national boundaries for the first time since the Ottoman Empire collapsed.
You'd think that kind of geopolitical change — once properly considered — would put a floor under oil prices regardless of what's happening on the demand side. All you have to do is read a headline like "Libya to be a 'new Somalia'" that I saw today to get an idea of where things might be headed in North Africa and the Middle East.
Even if it doesn't play out the way we're expecting, we'd still suggest these pauses in a long-term bull market are the right time and place to buy rather than sell.
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