Metal Fatigue

Inflation fears are hammering the markets and dealing blows to all the major indices, and oddly to commodities. Thursday will see release of the April PPI number, followed by the CPI on Friday. They'll be closely watched and heavily traded. If either number exceeds expectation of 0.2-0.3% gains by any great amount, markets will continue this nasty correction, and smoke the Bear out of its cave. Gold and silver could be wobbly too, though base metals should start seeing support going forward since they are growth loving markets and gold/silver will see their inflation/disaster hedge value come back to the fore. Keep your powder dry until those numbers are out. We've voiced concern before about the over-hot Chinese economy, but didn't expect markets to signal full retreat on China agreeing with us. The Chinese commodity boom is not over, not if Beijing has anything to say about it at least. But that's neither the only nor the main issue the markets will have to struggle with right now. We noted since this sell-off began the extent of a demand decrease we'll see from China is unknowable. But the Chinese government is looking to slow growth, not induce a recession. Its comfort level for growth rates is 6-7%, by developed country standards a still very steep demand growth curve. Will there be a demand slowdown? Yes, but not necessarily a large one. Has the market overreacted? Definitely, and its reacting to the wrong stimulus as well. Why all the fuss? The steep drops in a host of commodity prices are a measure of the spec money that had been chasing them. We think most of the declines have been speculators (hedge funds and the like minded) unwinding long positions at a furious pace. This is borne out by the market action itself. The commodities with the fastest upwards movement due to having less liquid markets, have also seen the biggest downside moves. This partially explains why silver and nickel have been particularly painful, though silver's physical market still looks tight and nickel's definitely is. Funds tend to "be half the market" when they sell, so smaller markets get hardest hit. Based on demand factors, we continue to view the current environment as in keeping with the early to mid stages of a secular bull market for metals. The problem for all markets right now is the certainty of rising interest rates. As we've pointed out ...

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