Attention of the World’s Equity & Commodity Markets is turning back to the European Union and its sovereign debt crisis. Euro-zone finance ministers met Monday to try to figure out how to implement the recently agreed upon measures to stabilize the EU banking and financial system. There are growing doubts about a credible plan of action that can be agreed upon by the major EU countries.
In overnight news, China’s consumer price inflation dropped in June and is now at its lowest level in over two years. A German Treasury bill auction Monday fetched a record negative yield, following last week’s European Central Bank rate cut. Equity & Commodity Markets now waiting for Wednesday’s FOMC minutes from the Federal Reserve for any clues on U.S. monetary policy actions upcoming. Many commodity markets presently trying to rebound from their lows and showing some strength, to begin to suggest the sector has bottomed out. Remember that markets will start to react to anticipated events before they actually occur. That means the raw Commodity Markets sector could start to rebound even though some more bad economic news may be coming in the near term.
Commodity Markets: Global Food Prices set to escalate
U.S. Corn production may drop to 11 billion bushels, the smallest crop in seven years; because the hot, dry weather killed the pollen and rains now may be too late to reverse the damage. While the U.S.harvest is about two months away, the drought reached plants at the most vulnerable period in their growing cycle. Based on current soil moisture and June temperatures, the drought is probably the worst since 1988. The drought may spark a rebound in Global Food Prices this month through October, halting a slide that sent costs in June to the lowest level in 21 months. The USDA may cut its production forecast by 8.5%, the biggest July reduction since a drought in 1988 led the government to cut its estimate by 29%. The dairy and livestock industries are going to get hit very hard. People are just beginning to realize the depth of the problem.
Global Food Prices already seem to be rising on the upside highway. In the last 4 to 5 weeks we have seen Agro Commodities like Turmeric, Cotton Seed, Refined Soy Oil, Coriander (Dhaniya), Pepper, Mustard Seed, Wheat, Chilies, Cumin Seed (Jeera), Castor Seed, Cardamom, Cotton, Palm Oil & Mentha Oil rise to yearly highs. Soybeans & Corn are close to a record high with deteriorating stockpiles & production conditions. China’s soybean imports in June totaled 5.62 million tonnes, up 31% from a year earlier & the total June edible oil imports in China spurted by 15% from the same month in last year ,and 17% from May to 5.40 lakh metric tonnes. While the total imports during January to June reported at 3.27 million tonnes, up 21% from the last year in the same month.Malaysia’s June crude palm oil output has increased by 6.3% from May to 1.47 million metric tonnes. MPOB stated that the end-June palm oil stocks declined by 4.9% from end-May to 1.70 million tonnes, the lowest level in 14 months. Malaysia’s June palm oil exports augmented by 8.7% to 1.53 million tonnes.
Commodity Markets: Gold prices positioned to rally only on real News.
Gold’s inflation-hedge appeal will surely increase as U.S. Soybean futures surge to a record high and corn rallies due to fears that severely dry conditions currently seen in the U.S. Midwest could lead to rising commodity inflation. Agro commodity prices are rising around the world as forecasted almost a year ago but the real pain is expected to kick in only from 2013 onward. A rise in Crude Oil prices will be all that will be needed now to complete the further Inflation rise scenario. The US dollar may now tend to loose its upward steam & get weaker due to the rising expectations of a new round of Monetary Easing by the Fed. A spike in raw commodity prices is an after effect of substantially massive Monetary Easing which seems unavoidable given the current global economic scenarios.
Economists polled by Reuters now attach a 70% chance to the Fed’s embarking on another round of quantitative easing or buying government bonds to lower borrowing costs. That estimate has increased from around 50% in late June.
A weaker dollar combined with rising inflation is the ideal combination of ingredients required for a renewed Gold Bull run. I would bet on Buying Gold December Futures at dips. The Euro is technically on its most highly oversold condition & is expected to rise, thereby helping Gold prices to rise. Equity & Commodity Markets will see a rise eventually close to the last quarter of 2012. Silver Prices along with other Industrial Metals like Copper will rise to, never before seen prices, as an after effect of the same. Much of the upside for silver remains capped due to weak industrial demand and high stockpiles in China.
Commodity Markets: Macroeconomic environment seems positive for Gold Prices.
For any investment demand to pick up, the Commodity Markets need either a sharp increase in real demand, substantial US dollar weakness or more US Federal Reserve’s (3rd round) quantitative easing. With more Money Printing through quantitative easing, the US dollar would weaken & there would be a demand in the markets, though making the demand short lived in the longer run, due to the artificial injection.
Central banks around the world are getting nervous about soft economic activity again & the concern is clearly indicated, although through small tentative steps so far, such as the Federal Reserve’s extension of the Operation Twist program, Twice seen China’s rate cuts, the European Central Bank’s pledge of 100 billion euros to Spanish banks and the U.K.’s stepped-up asset purchase program. But these small tentative measures adopted so far lack the punch of massive Quantitative Easing programs. These large liquidity injections are now only a matter of time in Europe, while the banking sector totters & unemployment with high austerity measures trigger civil unrest; in theU.S., while economic reports (especially employment numbers) continue to show the recovery stumbling; and in China, where manufacturing is vulnerable to weaker export markets. Downside risks include a Greek exit from the euro-zone, more banking stress or euro-zone disharmony, a hard economic landing in China and further slowing of U.S. growth. Upside risks include agreements on euro-zone sovereign-debt issues or greater-than-expected stimulus from China & the U.S.
Against a backdrop of sustained market turmoil and wealth erosion, investors are seeking trusted sources of security for their portfolios, according to a latest update from the World Gold Council (WGC). Gold can contribute in this role by acting as a consistent portfolio diversifier – managing risk and mitigating potential losses in the portfolios of UK investors, an imperative in the prevailing environment.
The latest update from WGC is titled ‘Gold as a strategic asset for UK investors’ and it examines gold’s role within a sterling-denominated investment portfolio. The report shows how gold performs as a portfolio diversifier, a preserver of wealth and a risk management mechanism, which is particularly important during times of economic and market stress. It highlights that the optimal long-term strategic allocation to gold for UK investors is between 2.6% to 9.5%, depending on the specific risk tolerance and assets held.
This study is the latest addition to a body of work, which focuses on the role of gold within currency-specific portfolios (US dollar, euro, and Japanese yen). The optimal allocations suggested in this study are consistent with those highlighted across other currencies and in almost every economic scenario.