Monday, September 26, 2011

Commodity Prices

Last week’s plunge in commodity prices may be a harbinger of much weaker economic activity. There could be more downside for commodity prices this week after the CME said in an email, after trading closed Friday, that gold margins will be raised by 21%, silver margins by 16%, and copper margins by 18%, effective at the close of trading Monday. The price of a barrel of Brent plunged 6.0% last week to $105.65, the lowest since August 10. The good news is that these declines in commodity prices will boost the purchasing power of consumers and producers, and will lower headline inflation rates around the world.

Last week, I suggested that the price of copper might retest its June 7, 2010 low of $2.76 per pound. This morning, it is down again to $3.21. The price of gold is down again this morning to $1,614 an ounce, putting it 14.8% below its record high of $1,895 on September 5-6. Where might the price of gold find support? It should do so at its 200-day moving average, which was $1,524 on Friday.

There is mounting evidence that the global economy is slowing. It doesn’t add up to a double dip just yet. But the risk is that it might be heading in that direction. I don’t like what I am seeing in our favorite indicator of global economic activity. The CRB raw industrials index plunged last week by 4.3%, led by a 9.0% drop in its five metals components. It is still 3.4% above its previous cyclical high on April 29, 2008 and 17.3% above last year’s low on February 8, where it is most likely to find support, in our opinion. This index is also highly correlated with the S&P 500 Transportation Index, which plunged 9.1% last week.

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