The market has stated repeatedly throughout 2010 that it’s good to own, “stuff.” Tangible assets with a finite supply have increased in value because they are known quantities. The United States and the European Union are devaluing their currencies through various forms of Quantitative easing and investors face growing concern that fiat currencies lack real meaning. The combination of low interest rates and limited supply has pushed the commodity markets to the front of the attractive investment sectors in 2010 and should continue to shine in 2011 as the U.S. economy falters under the weight of its own debt while reinventing itself as a global service provider rather than global manufacturer.
The commodity markets posted new investment interest highs in 18 markets in 2010. This means that almost half of all mature domestic commodity markets reported all time highs in outside investor interest. These markets not only include the headline leaders like gold, silver and oil but also cotton, which has doubled since August. Furthermore, investors are using the commodity markets to hedge their own portfolios in the face of uncertainty in the cash markets. Three commodity markets reached all time highs in investor interest on the short side. The S&P 500, 10 year Treasury Note and the Euro currency all set new records in 2010 for net investor short interest. These markets were sold in record numbers in anticipation of stock market declines in February, an expected rise in Treasury yields in April and a weakening of the Euro currency in May.
The stock and bond markets are unlikely to lure money away from the commodity markets in 2011. I think it’s very likely that we’ll see our economy slip back into recession by the third quarter of 2011 with unemployment climbing above 10.5% and moving past 11%. Generally speaking, the economy needs to create more than 100,000 jobs per month to hold the unemployment rate steady from the previous month. Eight million jobs have been lost since the recession began in December of 2007. Those jobs have not been replaced since the National Bureau of Economic Research signaled the end of the recession this past June. In fact, Princeton economist Paul Krugman states that the economy needs to create 250,000 jobs per month, every month, for the next five years just to get back to where we were before it all hit the fan in ’07. Finally, small business creation and growth is what drives the employment picture and the National Federation of Independent Businesses monthly surveys simply do not support a robust recovery picture.
This general picture is further supported by the most recent commitment of traders data commercial trader momentum in the S&P 500 turned negative to join the Dow and Nasdaq, which had already turned. Negative momentum across all three major indexes has been a reliable forecaster of topping action in the stock markets including the recent tops in April. When we combine this with the strong buying action across the short to mid term treasuries this past week, it’s clear that professional money is moving to safer bets to start the new year.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.