Well, that was quite some wake-up call.
I’d love to be able to say I called the top last week – I didn’t, but I did note that it was a very real possibility.
“This is the kind of excess that marks a top” I observed, and more besides.
We are talking commodities this week again – energy, metals, the lot.
What can I say, but “Oof!”?
Metals have sold off dramatically
Starting with gold, we got the feared double top at $2,070 an ounce. That was followed by a so-called “island reversal” pattern. That’s bearish, if you subscribe to such hocus pocus, and gold duly headed lower.
So far, gold has held around another historic price point: $1,920 – the old 2011 high – but the momentum is downwards and I rather fear the $1,800s now beckon.
Don’t try to make sense of it. Gold “should” be going higher – war, inflation, all the rest of it – but how often do we observe an enormous gulf between what gold should be doing and what it actually does?
None of this is helped, of course, by falling stockmarkets, which create a general sense of unease, not to mention liquidity drains.
The other precious metals – silver, platinum, palladium – all saw similar about-turns with the platinum group metals (PGMs) in particular experiencing vicious selling. Platinum lost over $200; palladium lost over $1,000.
I’ve no idea where the world suddenly thinks it’s going to get its palladium from, if Russia is out of the equation. But speculative excess is speculative excess and it trumps fundamentals, at least in the short term.
Base metals were similarly struck down. The spikes up in copper, aluminium, zinc, iron ore and lead all reversed and the bass metals have mostly returned to their break-out points.
As for nickel, who knows? It seems you can’t even trade it.
The fundamental case for higher metals prices remains. Even without this war, many years of underinvestment were leading to supply shortages. Hence the ongoing bull market.
The war triggered panic and frenzy, which is why we got those spikes. Now we have had the wash out, we probably need a settling period while markets find their feet and we can reassess.
The burning question is whether we now head into a bear market. My instinct is that we don’t, although where prices find their floor will tell us a great deal.
We’ll get a bounce at some point; indeed, that seems to be starting now. But how much spring will any bounce have?
The oil price has plunged too
Turning to oil next, Brent flirted with $140 a barrel before flipping and falling back into double figures. $98 is the current price.
The narrative that is now emerging is that we need to stop relying on – how shall I put it? – nations with insalubrious governments for our natural resources. Prime Minister Boris Johnson was articulating just such thoughts in The Telegraph this week, and he is now coming under increasing pressure to ignore green pressure groups and develop domestic oil and gas reserves.
In the US, all President Biden seems to be able to talk about is high gas prices (be it actual gas or the stuff more properly known as “petrol”). One wonders if his anti-domestic development policies will also do an about-turn, and America will try to regain its heady days of only a few years back when it was self-sufficient, and could meet all its oil and gas needs without having to rely on imports.
The anti-domestic development narrative is looking a lot less compelling in the face of the Ukraine invasion and can only be losing popular support.
This all points to increasing investment at home, and that should be good for all natural resource companies in “sensible” places. There is a growing need for the products and services such companies are providing, and there will soon be capital to back it up.
On the other hand, there is also a growing demand for windfall taxes on energy companies, especially in the US. Ugh!
Even with this correction, then, I suggest you should remain long energy and mining companies in sensible jurisdictions (albeit the US with some of its recent rulings does not necessarily count as sensible). Or to take this opportunity that we will have over the next few weeks to accumulate some positions and get long, if you are not already.
I note that the companies have not sold off to the same extent as the commodities themselves and that implies that disaster of the secular bear market variety is not yet at hand for commodities investors. There’s still some gas in the tank, so to speak.
I reserve the right to change my mind as events unfold – and I change my mind all the time, as regular readers will know – but for now my prognosis is that what we have just experienced is a correction of the “massive wash-out in a bull market” variety, rather than an end-of-days, secular top.
What do you think? Am I right?
I shall be watching prices, reading research (and Twitter), listening to cleverer people than me on podcasts and thinking avidly this week – and trying to do so with an open mind. This is one of those times that requires thought, but not yet necessarily action.
Onwards we trudge.
Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.