Welcome new reader!

Financial news I consider important, with my opinion, which is worth as much as you paid for it.
Please click HERE to read a synopsis of my view of the financial situation.

Sunday, November 14, 2010

Huge declines in Natural Resources Thursday and Friday

Well, I got to thank all the bloggers out there I quoted on Thursday AM for calling the impending natural resource decline. I sold over 50% of my positions on Thursday at the open. What proceeded to happen was natural resources lost huge ground Thursday and Friday. Gold didn't lose huge, but Sugar, Corn, and other foods did.
Sugar fell 12% in 2 days, a 22 year record in NY. Soybeans and corn fell so much, the exchanges closed.

It is possible natural resources will fall not much longer and the price hikes return in a week. I am going to be a little cautious here, and wait for 4 weeks-ish or more before buying back in. Gary of the Smart Money tracker seems to be a little more eager than me right here. I guess I need to recant my ditto head status of Gary. I am still 100% on board with Gary over the long haul, but for the short term, I am not going to try to catch falling knives. I lost a ton last year trying to that. Lesson learned.

I'll call myself wrong if gold starts hitting new highs, and I am OK with being late to the party and buying back in not at the bottom.

The question is, why am I so convinced that this retracement in natural resources is only a pause, in what we will see as a never ending rise in resources into a crisis?

Lets start with what triggered the sell off. Was food over extended, over valued and time for a return to lower prices? Perhaps. But my bet is the sell off was triggered by the exchanges changing reserve requirements on future contracts for natural resources. This triggered people leveraged to sell. This gimmick hardly changes fundamentals. All it does is punish those over-extended to sell their positions to gain back their margin.

Further, when prices correct so violently, it triggers a run for the door, accelerating the price decline. Once the herd however, realizes the house is not on fire, they will return buying, and driving prices up.

Further, we have an international currency war, with pending international trade war starting, combined with the Federal Reserve continuing it's easy money policy. The LAST thing we will see is natural resource prices hitting new lows. I freely admit, my timing could be off, and in the event the stock market falls uncontrollably, natural resources could hit new lows. But I am not betting at this point for a market crash. If you want to try to place such bets, go for it. Once again, I repeat, I am done with trying to catch falling knives.

For those thinking that deflation will take hold of natural resources and reduce prices, consider this. Sugar's low price in 2004 was 6.22 per pound, 10.47 in 2007, 18.07 in May 2010, and it hit high of 39.65 11-9-2010.

Corn 's LOW price in 2005 was 1.635, 2008 was 2.720, 2009 2.915, 6-29-10 3.025, and hit a high of 5.695 11-4-2010.

I could quote other foods and energy statistics, but there is one thing in common, prices are going higher at a relentless pace. Sure there are parabolic runs up, followed by a crash. But each crash's bottom is HIGHER than previous. The net is resources continue to March higher.

During the 2008 market crash, when many institutions where forced to liquidate, natural resources held values HIGHER than just 3 to 4 years earlier. Thats impressive considering the stock market fell to levels not seen since the 90's.

Further, this fits in my theory that natural resources will continue to march higher, as China and India's population of 2.5 billion people earn more, and will consume more. The net result will be American's/Western countries daily expenses going higher.

So while it is great to have reduced (not zero) exposure to natural resources for the moment, do not mistake this for a trend change. That won't happen unless we break 2008 lows, and I'll take any bet that it won't happen, and I'll bet every penny of my life's savings to boot.

Below is gold action since 2008, the draw downs are not far and not long.

Good luck.

No comments:

Post a Comment