No respite for commodities as euro slips

The euro managed a late in the day rebound against the dollar on Wednesday, but not before trading at its weakest price in about six weeks. So the fact that throughout the day the dollar strengthened made for another session when traders bolted for the exits in the commodity patch.

Chief among the victims was gold where investors suddenly turned cold towards the precious metal. Gold, which recently traded at an all-time high of $1,227.20 per ounce traded as low as $1,117 in after hours trading on Wednesday. That means that gold has slipped about 8% since last Thursday.

Gold was vulnerable to what we call “stop-loss” selling. At some point or another, we’ve all experienced it. Stop-loss orders are there to protect investors from weakening prices and lock into profits or to minimize losses. Gold set off plenty of these on Wednesday causing more and more sellers to seek a sharp exit. The same fate was felt by crude oil traders where the front contract slipped a couple of bucks per barrel.

Ongoing fears over sovereign debt ratings are worrying some investors into the belief that governments won’t be able to support larger deficit spending to help repair major economies. 

Standard & Poor's revised down the prospects for Spain's short-term ratings. Fitch downgraded Greek debt and Moody's Investors Service warned the U.K. and U.S. to rein in their deficits they wish to hang onto their triple-A credit. Finally Moody's downgraded debt of Dubai government-controlled companies.

The culprit for commodity weakness is of course a stronger dollar. First of all a positive tone for the dollar distracts investors from holding physical assets, but second, a strong dollar quite literally hurts demand for commodities because they become more expensive.

Wheat futures for March delivery continued to fall and settled at $5.3525 per bushel. Export demand has been falling in the face of the recent dollar rally despite this being the demand season. However, ample supplies continue to stunt any market advance. And when crude oil, silver and gold prices are in freefall at the same time, it certainly doesn’t instill confidence from the speculative crowd.

Today the USDA will get the morning off to a brisk start with its latest supply and demand estimates with the latest market prediction expecting a carryout of 886 million bushels. As for corn, analysts predict that a weak demand picture should allow the 2009/2010 ending inventory to rise in Thursday’s report.

March corn dropped on Wednesday on supply concerns and followed soybeans lower in price. That was despite fears for a large storm gathering, which has already dumped more than a foot of snow in some fields. However, the loss of irretrievable corn this late in the season is apparently not enough to put a bullish notion at the front of speculators’ minds.

Sounds very much to us like an opportunity is brewing somewhere within commodities. Funds have been flushed out and prices have certainly become far more reasonable. The late in the day sell-off in the dollar coupled with a close at the top of the day’s range for equities could set up a day of rebounding prices on Thursday. But first, crops have to weather the USDA supply and demand report.

The Supreme Council of the Secret Order of Jurojin

 Tyche Research

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