Commodity Trading: Bernanke Yanks The Rug From Underneath The Markets
What a mess…
Yesterday was a train wreck for commodities. Trading screens were filled with red as investors reacted to Fed Chairman Ben Bernanke’s Wednesday press conference.
Of course, not only were commodities sent sharply lower on Thursday, but equities followed suit with huge losses of their own. The Dow sank 2.4%, while the S&P 500 and Nasdaq plunged 2.5% and 2.2% respectively.
What happened?
In a nutshell, Bernanke told investors what they didn’t want to hear…
…the quantitative easing (QE) party is coming to an end.
The same stimulus program that has kept markets inflated over the past four years is on the verge of being unwound now that the US economy is stabilized.
Bernanke didn’t give a firm date, but he definitely hinted that QE “tapering” isn’t far away. After hearing the speech, many economists believe the Fed will start winding down QE in September 2013.
Not surprisingly, investors are trampling over each other to discount this policy adjustment into the markets.
Here are three big movers from yesterday’s commodity bloodbath…
Gold
Another enormous selloff for gold as it dropped $94 an ounce (-6.9%) to close at $1,280… the lowest closing price in over two and a half years. The $1,355 technical support level I mentioned in Wednesday’s gold article was broken decisively as selling pressure overwhelmed the market.
This is another huge black eye for investors who are convinced the yellow metal is still the best ‘safe haven’ investment markets have to offer. That is clearly not the case, and hasn’t been for quite some time.
Gold should be considered just another speculative investment that’s currently overwhelmed with negative investor sentiment.
Silver
Gold’s little brother fared even worse. Silver dropped $2 an ounce (-9.5%) to close at $19.56 yesterday. That’s the first time this metal has closed below $20 since the summer of 2010. Clearly, the tide has turned against silver.
As such, the metal should be treated the same as gold- a speculative asset stuck in a downtrend with extreme negative investor sentiment.
Copper
Copper revisited the 52-week low set in early May at $3.04 a pound. But Bernanke’s speech wasn’t the only thing that sent the industrial metal lower. Weak Chinese economic data helped fuel the red metal’s weakness.
The HSBC China Flash purchasing manager’s index came in at 48.3 in June compared to 49.2 in May. Consensus estimates had the reading coming in at 49.1. This abrupt and unexpected drop reveals China’s economy is struggling to achieve the strong growth it was once accustomed to.
However, unlike gold and silver, copper shouldn’t be treated as a speculative commodity. Copper is an essential industrial metal. And at $3.00 a pound, it is getting relatively inexpensive. These cheap prices mean we could see a big restocking push by the Chinese in coming months.
It all comes down to this…
QE has pushed markets (both equities and commodities) higher than investors and economists thought possible in recent years.
But now that Bernanke appears ready to finally pull the plug on QE, investors must come to grips with the economy standing on its own. And the most important thing for commodity investors to realize is that this acceptance process will not be smooth for the commodity markets.
In other words, be prepared for plenty of hard asset market volatility in coming weeks.
Until Next Time,
Justin Bennett
Category: Copper, Gold, Industrial Metals, Precious Metals, Silver
