The case for gold and
energy-related price spikes is rooted, in part, by good intentions hedging
against dollar fluctuations, inflation risk, and political discord. But unlike a level of rational speculation
one might expect to see, one has to wonder whether the market’s players are
overdoing their hand just a bit. Simply, the world of commodities gambling
has been turned into a shootout.
While oil production and
distribution (as with gold) has been spiking over the last 3 years, real demand has only turned up
modestly. Over that time, though, a
level of discomfort about employment, credit markets and equity gains has
created a new bias, one which seeks safe-haven hedge against all the world’s
ills. If accurate, these suspicions have
led to a compelling environment of fear-based capital gains. One might suspect, then, an
inevitable contraction if/when those fears are ameliorated.
While cheering resoundingly
for the party at this trough, I remain suspicious that a revival in confidence,
or a lessening of global tensions, could cause a shift in capital flow from
speculation to growth. After all, aren’t
we all hoping for a global economic
renaissance? For now, one can do little
to dissuade the speculation in natural resources. But not to prepare for a potential portfolio
overload is also to ignore the warning signs.
Challenge.
When markets shift from
fundamentals to exogenous news it creates unintended consequences, not the
least of which is lack of focus upon empirical data. One of my colleagues incredulously watches
the persistence of these mini-rallies and exclaims “Don’t they see the reality
behind their exuberance?” It is
painfully obvious to some that despite anecdotal incidences of year-over-year earnings
improvements the general global economic climate must still deal with unwinding
credit and building back fiscal sanity.
As a result, I see my
stochastic integers separating from current price trends. We have, in fact,
seen a “double top” in relative strength, followed by indications of a bear
cycle resumption. While the markets, and
certain sectors, remain robust, deep cyclical devaluations remain a
probability. Profits, generated by demand, remain a key pre-indicator of economic
and market strength.
Execution.
These surges in speculation
are reminiscent of the dot.com enthusiasm of a previous decade. That price expansion cycle had severe
negative performance consequences which none of us wish to see again. Nevertheless,
despite history, commodity price speculation mirrors a decoupling from
fundamentals, specifically, and looks more like a fanaticism that mirrors
opportunity and fear.
With few exceptions clients
might notice that such conditionality necessitates a modest change in our
execution. Markets are becoming more
staccato, RSI patterns are more linear/less measurable, and price sequences are
shorter, thereby causing a more trading-oriented configuration. That implies more decision-making, less
stability, and less comfort with buy-and-hold methodologies as confidence wanes,
discomfort grows.
Within that context, prices
inflate/deflate quickly, asset allocation shifts accelerate, and negative
probabilities expand.
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