Friday, October 10, 2008

Commodity Castration/Things to Watch

Hello everyone!

I just wanted to send out a quick update to everyone as we head into the close. Stay away from commodities short term.

Hedge funds are being forced to liquidate as they continue to get margin calls from the banks and redemption requests from investors. Gold has dropped 5%. The fundamentals for gold may be strong, but hedge funds need money so stay the hell away until this process is over!

Here is a gold update from Bloomberg. Gold is now down $45 a share. this has nothing to do with valuations. The reason the hedge funds are selling good stocks and commodities is because there is a lot of stuff on their books that has no bid right now. Securities like AAA subprime sandwiches have no value so the hedgies can't us them to raise cash.

This is also spreading into stocks in the equity markets. Wait until this process is over and look for a bottoming pattern before jumping back into commodities. This is a good thing because its going to create a great entry point on commodities like oil and gold when the hedgies are done liquidating.

Oil is another great example of this. It has dropped almost $10 on the day. These are incredible moves. Be patient before jumping into these. I expect that these margin calls are close to being over but today is not the day to try and find a bottom!

Don't forget that we also have a severe deflation threat to commodities as well.

Expect the close to be violent either higher or lower from here. The G-7 supposedly cannot come to an agreement on how to solve the financial crisis. This is creating some fear on the floor. Italy has supposedly not been very supportive.

This could spark another wave of selling Monday if the world cannot come to some type of agreement on global intervention that can relieve the credit markets.

Best wishes to all, and have a great weekend.


Anonymous said...

Jeff, could you write down the time of your postings, too? Kind regards.

Jeff said...

3:15 on the last post anon

johndaniels said...

hey Jeff: IMHO bad advice.

Now is the time to be loading up on commodities, not avoiding them.

Silver hit none bucks and change, dealer websites (like apmex) crashing from traffic overload. There is no supply except 1,000 OZ bars.

platinum? theres no supply except a handful of 1/10 ouncers, selling at over 2,000 an ounce.

gold? gold has come back a bit, silver and platinum are the most notoriusly manipulated here.

oil? USO will be a certain buy at the high 50's if it gets there.

who knows. the money exiting the markets is not disappearing, and the fed is hyperinflating. i dont think people are burning dollars, the cash is only leaving the investment domain, not the money supply, therefore the deflation is expressed in assets. it seems like a big set up. im fine either way got enough cash, but if everyones got cash, hoarded, is that true deflation, or monetary inflation expressed as deflation in assets? who knows. :)

Jeff said...


I agree long term. I agree with the fundamentals.

I am talking days not months. The liquidations should be close to being over.

I am licking my chops as it drops in price. My point here is these hedgie liquidations are going to provide artificially low entry entry points due to forced sales of assets.

The inflation/deflation is always a great debate. I think its going to be both...Deflation at first followed by massive inflation and possibly hyperinflation.

If you are still a buyer of more gold, hold tight because I think prices may still be forced lower due to the hedgies.

Another things that could keep gold lower are the strengthening dollar as Europe collapses, and a nice bounce in the market which is entirely possible. Both are usually bearish for gold.

Tou make great points about supply and the inflation risks. Gold will take a moonshot down the road. I just think its a little early.


Avl Guy said...

If you smooth out the end of this week's S&P chart, the full week shows an orderly decline across all 5 days.
Very nice chart.

I read the other technical guys' blogs about charting the next S&P bttms, esp Barry R @ Big Picture, good luck, dont see how today's credit crunch and debt unwind forces are reflected in any where are the binding relevancies?

Re: the hedge fund story, we could've saw it coming...redemption story had a bit of coverage earlier this week.
Good post Jeff.

Jeff said...



I agree. The charts are kinda meaningless right now. THis is uncharted territory.

The liquidations have made it near impossible to trade based on daily charts.

I did see a nice piece comparing the charts from this collapse to the '73/'73 bear. They are pretty similiar so far.

The difference here is I think the system is broken today!