Oil Collapses and Copper Crashes 8% in Day – Great Recession Cometh?

Oil prices fell another 1 percent this morning  and continue their collapse – down 57% in just over 6 months. Copper crashed 8% on the London Metal Exchange, plunging to 5 and a half year lows.

Oil fell to fresh six-year lows and has fallen almost 60 percent since June 30, 2014 to levels last seen in early 2009 after the 2008 crash (see chart).

February Brent crude dropped another 79 cents to $45.80 a barrel and West Texas Intermediate crude for was at $45.34, down 55 cents. Copper for delivery in three months on the LME dropped as much as 8.7 percent to $5,353.25 a metric ton, the lowest intraday price since July 2009. Nickel slid 4.6 percent and lead fell 3.8 percent to the lowest in more than two years.

Commodities came under further pressure after the World Bank cut its forecasts for global growth, reinforcing worries of a gloomy economic outlook.

There has been much speculation in recent months as to the causes of oil’s dramatic crash in price. Some analysts have suggested that Saudi Arabia is attempting to put the U.S. shale oil industry out of business in order to keep the U.S. dependent on Saudi oil exports. Others suggest that prices were forced down by the Gulf states and the U.S. in order to damage Russia’s exports and its economy.

These may be factors but it is becoming increasingly clear that if they are, they are secondary factors to the major trend which is falling demand and a slowdown in the global economy – this is most pronounced in China, in Japan and in Europe.

We already have witnessed the customary New Year’s hype from many banks and governments that this year will finally be the year when economies come off the life-support of ultra low interest rates – even as they cheer-lead the ECB’s expected foray into QE and euro money printing.

However, the fact is that the omens for the economy this year are far from good. The most telling sign is not specifically that oil prices are collapsing but that it is happening in conjunction with the most widely used industrial metal – copper.

Copper fell over 8 per cent today, after a 1.3 per cent fall yesterday hitting its lowest level in nearly five years on the back of an 18% decline last year.

China has been the major user of the metal in recent years as its construction industry boomed. The Chinese housing and property market is now slowing down with the potential for a staggering collapse as dozens of “ghost cities” – brand new cities financed by reckless banks with nobody to occupy them – unwind.

The effects of such would be harsh on metal and commodity exporting countries, particularly those exposed to China like Australia and Brazil.

While copper has seen the most notable declines, other industrial metals are also faring poorly. According to Bloomberg, “A gauge of the six main industrial metals has declined 9.3 percent in the past 12 months to the lowest since June 7, 2010.”

Clearly global industrial production is slowing down.

When oil price declines are viewed against this backdrop a more worrying picture emerges. Oil prices are now at almost six-year lows and this despite record imports of oil by China.

The Financial Times report that trade data showed “China imported 30.37m tonnes of crude in December, up 19.5 per cent month-on-month.”

In only six months oil has lost 60% of it’s value. This may have been partly exacerbated by strategic maneuvering by various players but, by any standard, such a decline must be viewed with alarm.

The recent plunge in commodity prices and especially copper should also be viewed with alarm. It is said that copper should be known as Doctor Copper as the metal is said to have a PhD in Economics and the ability to predict future economic growth or a lack thereof.

Are we on the verge of a global depression?

Only, time will tell. The inability of central banks to stoke inflation and sustainable economic growth, statistics from Europe suggesting deflation, and stubborn and rising unemployment across the western world would suggest that it is a real possibility.

At the very least, the ‘great recession’ seems likely to continue. A serious recession or depression will likely collapse the already fragile banking system, especially in Europe, and the savings of ordinary people and companies will become exposed to bail-ins.

As ever, there are so many actors, factors and potential outcomes, it is unwise to predict exact outcomes. All we can be sure of is that the outlook is uncertain and unfortunately negative and we should prepare accordingly.

From a financial perspective, now is the time to be risk averse and diversify and favour safe haven assets such as safer forms of cash, bonds, hard assets and of course physical gold.

REVIEW of 2014 – Gold Second Best Currency, +13% in EUR, +6% GBPMARKET UPDATEToday’s AM fix was USD 1,228.75, EUR 1,044.99 and GBP 808.76 per ounce.
Yesterday’s AM fix was USD 1,239.00, EUR 1,049.91 and GBP 820.97 per ounce.

Spot gold fell $3.40 or 0.28% to $1,230.40 per ounce yesterday and silver climbed $0.44 or 2.66%  to $17.01 per ounce.

Gold prices are little changed near $1,230 early in late trading in London, after hitting a 12-week high of $1,243.60 in the previous session.

Spot gold in Singapore fell marginally as demand in China was muted and there were COMEX resting offers. Intraday stops were triggered pushing gold lower before quickly rebounding back to $1,230 per ounce, where gold remains.

The euro was pinned near nine-year lows today and euro gold remained near EUR 1,050 per ounce on investor concerns  regarding ‘Gexit’ and the possibility of ECB QE. The metal rose to  EUR 1,054.74 per ounce yesterday, its strongest since September 2013.

Gold in euros remained just short of its highest level since September 2013 after Greek Finance Minister Gikas Hardouvelis said that Greece could exit the currency bloc as the opposition party holds a slim lead heading into the election on January 25th.

Sentiment remains poor – ETF gold bullion holdings slipped 3.2 metric tons to 1,595.9 tons yesterday, the lowest since April 2009.

On the wider markets , concerns about the global economy saw Asian equities lower and European stocks are down, mirroring a slump in copper and oil prices after the World Bank cut its global growth forecast for this year.

Benchmark Brent crude oil futures are 1.4% lower, extending their recent sharp slide as commodities were sold off (see above).

Silver is down 2 per cent after a near 3 percent jump yesterday. Platinum lost 0.6 percent to $1,233.13 an ounce and palladium dropped 2.6 percent, to reach $785.80 an ounce.

Gold remains the most resilient of the metals and indeed the commodities and is down just 0.15% despite its recent strong gains and the losses in stocks markets and the sharp losses seen in commodity markets.

OUTLOOK 2015 – Uncertainty, Volatility, Possible Reset – DIVERSIFY