The most important factor in assessing commodities trends is world industrial production.

Just-released data by the CPB revealed a 1.2% gain in world industrial production (IP) in November, the eighth consecutive monthly increase.


As today’s Hot Chart shows, the November outcome propelled output in positive territory on a year/year basis for the first time since the Lehman bankruptcy. Even more encouragingly, our world leading economic indicator suggests a more pronounced improvement in global IP in the coming months (in the range of 6%). While it is true that the inventories of certain commodities are high by historical standards, we believe that the upward momentum in global IP will limit the extent of the downside.
Bottom-line: Even if commodity prices are unlikely to spike in the near term, a large correction is also unlikely given that accelerating demand will start digging into inventories.


World Trade Volume Rises 1.1% in November

Based on preliminary data the world trade volume expanded by 1,1% in November from the previous month, following an increase of 1,4% in October (revised upward from 0,8%).

World import volumes increased by 2.6% in November whereas world export volumes declined by 0.3%. This discrepancy is fully reflected in (partly estimated) diverging price trends. Import volumes of emerging countries continued to expand strongly, by 5% on average. In the advanced economies as a whole, import volumes increased marginally in November, after having declined slightly in October. In Japan the rebound was marked, October having posted a very weak figure.
European imports decreased however. In November, trade was still 12% below the peak level reached in April 2008, as the world economy is recovering from the unprecedented decline that occurred in November 2008 -January 2009. It was however 10% above the trough reached in May 2009.

Monthly trade figures are volatile and focus on ‘momentum’ is therefore preferable. Momentum remains remarkably strong. In the three months up to November, world trade was up by 5,7% from the preceding three
months, the highest figure in our series, which start in 1991.

World trade prices
In the three months up to November, dollar prices of world trade were up by 4.0% from the preceding three months. This is the sixth consecutive month of positive price momentum, which contrasts sharply with the deep declines that occurred towards the end of 2008. Dollar prices of traded manufactures continued to increase in November, momentum being 3.1%, the highest figure since July 2008.

World merchandise trade, volume, seasonally adjusted



Full CPB release



imageNorthern Trust December Perspective Issue has a chart that highlights China’s  share of demand for aluminum, copper and steel.

China now accounts for 40% of Al total (not incremental !) demand, 42% for Cu and 48% for steel.

This is truly remarkable. In 2004, China accounted for 16% of world Al consumption and Alcan was forecasting that that proportion would rise to 25% in 2010.

Goldman Sachs shows that the game is far from being over for aluminum as Chinese GDP keeps rising. The outlook for copper does not look as bullish by the same variable.





CLSA’s Andy Rothman comments on China’s housing market:

China’s property developers have been working overtime, with housing starts rising 194% YoY in November.  This follows 50%+ YoY increases in both September and October, driven by very low inventory levels and very high demand, as well as supportive government policies ( particularly access to bank credit for developers) designed to cool price growth by bringing more supply to the market next year.

In addition to slowing the growth rate of new home prices next year, the frenzied pace of housing starts – – coming on top of rising infrastructure spending – – also means that China’s demand for commodities and construction equipment will rise exceptionally fast over the next 6-9 months, leading us to believe that iron ore and copper prices will be stronger than expected.

From the WSJ:

China’s urban property prices grew at their fastest pace in 16 months in November, increasing concerns a market bubble may be forming and underscoring the challenge Beijing faces in sustaining the country’s economic recovery while avoiding excess.(…)

Property prices in 70 of China’s large and medium-sized cities rose 5.7% in November from a year earlier, accelerating from October’s 3.9% rise, National Bureau of Statistics data showed Thursday. (…) Prices in November rose 1.2% from October, accelerating from October’s sequential rise of 0.7%, the bureau said.(…)

The State Council, or cabinet, decided Wednesday that starting next year, sales of homes by individuals will be exempt from tax only after at least five years of ownership. The government in January had reduced the period to two years to encourage home sales.(…)

Investment in real-estate development, one of the main forms of private investment in China, rose 17.8% to 3.13 trillion yuan ($458.5 billion) in the January-November period from a year earlier, up from a revised 16.6% in the January-October period, the statistics bureau also said.(…)

Newly started real-estate construction surged 15.8% in the January-November period to 976 million square meters from the year-earlier period, up from just a 3.3% rise in the January-October period.

Nationwide property sales between January and November, including those in smaller cities, totaled 752 million square meters, up 53% from the year-earlier period, the bureau said.

Among the 70 large- and medium-sized cities in the statistics bureau survey, prices of newly built residential properties rose 6.2% in November from a year earlier, accelerating from a 4% rise in October.

Prices in the secondary market rose 5.5% in November from a year earlier, higher than October’s 4.6% rise. 

Full WSJ article

Also from the FT today:  Asia enjoys property boom

Related posts:



Three commentators discuss the same phenomenon:

OVER THE PAST DECADE, stock and bond prices have generally moved in opposite directions, meaning that share prices and bond yields have moved together, both higher and lower.(…)

This important relationship held true this year until June, when bond yields peaked. One month later, as yields moved lower, stocks began their current leg up.(…)

Given their relationship at major turning points over the years, something is not quite right. And when it comes to trusting bonds or stocks for the correct "opinion," history would suggest that it’s usually better to go with bonds.(…)

One part of the bond market caught my eye this week. The yield on two-year Treasury notes fell nearly 40% to an unreal low of 0.67% and is just a hair from its generational low of one year ago.

[Getting Tech chart]

This is important for two reasons. The first is that one year ago, the financial markets were nearly frozen and investors looked for the safest places possible to park their money. Treasury securities with short maturities were the only assets that were holding their value and demand to own them pushed prices up and yields way down.

The second reason is that the yield on the two-year note joined three-month bills in approaching zero again. Longer dated Treasury yields, from five years to 30 years, are not even close to reaching respective 2008 lows and that suggests that some money is moving towards an extreme safety position again.(…)

Full Barron’s article

And David Rosenberg

The U.S. 10-year Treasury note yield gapped above the 50-day moving average yesterday. In the past six months we have been in a most unusual backdrop: bond prices up, equity prices up, oil prices up and gold prices up. Looking back at the historical record, this is what you call a 1-in-15 event. In other words, not normal, and something has to give.

In the past, it has been Mr. Bond, shaken and stirred, that has been the arbiter of realigning the asset mix. (…)

The odd man out here is clearly the bond, but if yields head back up to 4% (about 50% of the rally in the 10-year note has just been retraced in this recent spasm in yield), expect a countertrend rally in the U.S. dollar over the near-term and a giveback in all these risky assets that all of sudden become 90% correlated with the greenback.

As for the vast amount of supply we mentioned above, well, the U.S. Treasury is going to auction — get this — $105 billion in Treasury bills and notes next week. Talk about choking on the wishbone. This fiscal largesse may come at a pretty big cost and aside from a countertrend rally in the U.S. dollar (as Mr. Trichet is pushing for) a further yield spasm in the Treasury market at a time when the economy is still struggling (ISM services back below 50 — that is not good) could well be enough to upset the equity market apple cart; just as investors are closing their books as the year draws to a close. Buying some protection, especially now that it is cheap, may not be a bad idea.

Tony Boeckh adds

The last nine months have been a remarkable period in that equities, gold and corporate bonds have all appreciated by double digits. This has only occurred on two other occasions in the last 50 years. Typically, equities perform best during periods of low and stable inflation, like the current environment. Gold (and other commodities) performs best during inflationary periods and when the dollar is weak, while government bonds tend to outperform during periods of deflation and risk aversion. The current, unusual dynamic where almost everything has gone up together cannot last forever.(…)

The current environment diverges from the typical cycle in that easy policy is not translating into domestic consumer or business credit expansion.



Dennis Gartman sums up the Dubai situation quite well:

THE YEN AND THE US DOLLAR  ARE SOARING AND PANIC IS IN THE AIR as the world is focusing again this morning on the news out of Dubai that Dubai World, the quasi-government controlled “investment” vehicle
there has all but declared bankruptcy. Panic is indeed in the air, and well it should be, for this is amongst the worst of news one might conjure up and is one more spear driven into the heart of capitalism by greed and
over-extension. We are seeing capital fleeing to safety where it can, and we are seeing massive unwinding of short US dollar positions as the “carry trade” that had been wound up is now being unwound under duress.

This unwinding process shall not likely be a one-off, one or two day circumstance, for it was not a one-off, one or two-day circumstance when the positions were put one. Rather the “carry trade” has been
increasing in size for weeks and months, and it will take weeks… at least… to unwind it. Yesterday and today we are seeing the wiser
money exiting the position. Next week, and perhaps the week after and
perhaps the week after that we’ll see the late arrivals to the trade being forced from their positions by angry and angrier margin clerks.

Secondly, we find it fascinating how little coverage there has been in the major news media here in the US of the situation in Dubai. It is as if nothing has happened, when indeed something truly major has.(…)

Who is most exposed to Dubai? The BIS reported cross-border banking exposure for UAE as a whole totaling $123 bln at the end of June. Of that total, the UK is by far the biggest creditor with a share of 41%. European banks hold 72%, with the US and Japan only holding 9% and 7% of the total exposure, respectively. France and Germany each account for around 9% of the total.

It is for this reason that the British Pound Sterling has gotten hit so very hard in the past 48 hours. Well it should. The UK banks… almost all of which are clients of TGL so it pains us to write such things… now find
themselves dealing with a huge new set of real estate problems and it was real estate that was the most serious problem that these banks were already attempting to deal with. The British banks did not need a new, material problem to deal with, for they had plenty at home or in Hong Kong, or China to deal with already. Nonetheless, that is the situation they find themselves in and that is the reason why Sterling is so weak and why gold predicated in Sterling is so strong.(…)

Further, and finally, we are reprinting what we wrote here yesterday regarding Dubai and the situation there.(…)

We are somewhat amused to hear many commentators saying that [the Dubai World situation] was “unexpected” or a “great surprise,” or was
“shocking.” It is not unexpected; nor is it a surprise nor should it be shocking, for Dubai and Dubai World had rather obviously over-extended… garishly so. When great new skyscrapers are built, it is always… ALWAYS… a sign that the top is imminent and that the market’s participants had o’re-reached themselves.

Icarus flew too close to the sun, and Dubai and its developers did the same. We can only assume that the far more reasonable, far more conservative, far wiser authorities and market participants in Abu Dhabi,
Sharjah and the other Emirates are feeling a bit smug as their all-too-aggressive brethren in Dubai plunge rather swiftly back to earth.

What does this mean then? It means that money will, for the next several months and perhaps even several years, feel far less confident about moving to The Gulf. It means that money will flow elsewhere… perhaps to
gold; perhaps to the dollar; perhaps to Canada, Australia, New Zealand and Europe… but it will leave the Gulf, for suddenly the capital that had been moving to The Gulf is now confused, and confusion breeds contempt. That is the only thing of which we are certain: Capital that had been going to The Gulf will, at the margin, look elsewhere. Frightened, confused capital always does.

Finally, and perhaps most importantly, we fear that this news might be the news that tends to push equities around the world over the edge; that brings on a trend toward global protectionism and that pushes the US dollar materially higher… and perhaps violently so. We hope we are wrong; indeed, we pray that we are terribly so, but we fear that we are not. The long Thanksgiving holiday will give everyone the chance to
collectively breathe and consider what has happened in the Gulf. Perhaps cooler heads shall prevail as the next several days pass, and perhaps this situation will simply devolve into memory and into nothing; but we fear that this is a far larger story than it appears even this morning and if it is we may be surprised by how strong the dollar becomes…and how swiftly it does so.

We said these things yesterday. We meant them then and we mean them even more this morning. All other concerns are secondary today. Dubai is centre stage, and well it should be.

Finally, regarding Dubai, the authorities there have been “spinning” their decision to the best of their abilities… rather unsuccessfully we might add. Yesterday, Sheikh Ahmed bin Saeed al-Maktoum, said in a prepared statement “Our intervention in Dubai World was carefully planned and reflects its specific financial positions… Further information will be made
available next week… The Government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react. We understand the concerns of the market and the creditors in particular; however we have had to intervene because of the need to take decisive action to address its particular debt burden.”

In other words, go pound sand…. Pun intended.



The Fed’s Misguided Monetary Policy
The monetary policy being pursued by the Federal Reserve, which
is aiming at boosting asset prices, actually leads to more economic and financial volatility. I’d also like to mention that the easy monetary policies of the Fed also lead to colossal debt growth.

image You can print money and you can increase your debt and you can put everything on the balance sheet of the government, but it is unlikely to help the typical household in the United States. It may help Wall Street and it may help some asset markets, but not the standard of living. Otherwise, if money printing would make countries rich Zimbabwe would be the richest country at the present time.

Even under a gold standard, where money and credit is relatively tightly controlled, you can get bubbles in one sector of the economy or another. In this case, everything went up — equity prices, real estate prices, commodity prices — and not just in the U.S., but everywhere in the world. During this period of time, the only thing that went down was the U.S. dollar.

In my opinion, the government in the U.S. will continue to print money, with all the negative consequences that go along with it. And so, I think that looking forward, investors have to be very clear that if the dollar is very weak, there is a chance that equity prices around the world could rally quite substantially.

It’s not so evident that the dollar will totally implode against the euro and other paper currencies because the other central bankers are also money printers. But it is my opinion that it will continue to implode against commodities. Some more than others, but commodities where there are shortages will perform okay. And, in particular, when interest rates are at zero, then obviously gold, silver, platinum and palladium become currency of choice.

I don’t see why someone would hold dollars and not hold some physical gold. There’s no cost associated with holding the gold, compared to dollars that have no return. I think that, gradually more and more people will come to the realization that they have to own some resources, some commodities and some mining companies and obviously some physical precious metal.

How Did Economists Miss the Problem?
There was recently an article by Paul Krugman in the New York Times titled “How Did Economists Get It So Wrong?” Well, first of all, I think the title should have been “How Did I Get It So Wrong?”

I’d also like to point out that not every economist got it so wrong. The economists at the Federal Reserve and the economists at the Treasury and the economists at universities got it so wrong. But private economists have been warning about this excessive debt growth for quite some time, and were very concerned about it.

The real problem of the housing market was not that home prices went down, but rather the excessive leverage of homeowners. Partly encouraged by artificially low interest rates and partly encouraged verbally by the Federal Reserve, homeowners borrowed more and more against their homes. That’s why I find the Fed essentially mistaken in its belief that the problems were not foreseeable.

Total New Borrowings by Households and Non-Financial Business % PGDP

PGDP = Implicit Price Deflator for GDP
Source: Bridgewater Associates, Goldman Sachs

The chart above shows total new borrowings by households and non-financial businesses. Credit growth accelerated to a peak annual rate of 18 percent at the end of 2006. It slowed down following the rate cut in September 2007, then accelerated once again a little bit. Then in 2008, it totally collapsed. And, of course, for an economy that is driven by credit, such as the U.S., a total credit growth collapse is a disaster.

The private sector is now de-leveraging. Households and businesses are behaving rationally – they are saving more, they are paying down their debts. That’s a rational action to take in a recession such as we have. At the same time, the government has come in and built up – the U.S. Treasury as a percent of the economy has expanded very rapidly. The fiscal benefits this year will probably be around $2 trillion.

The problem with all this is, in my opinion, is that the government’s role can’t really come down significantly because the moment you reduced your fiscal deficit, you would again have a negative impact on the economy. So I think that as far as the eye can see, we will have artificially low interest rates, near zero percent, because unemployment in the U.S. is not going to go away overnight. And at the same time, the deficit will stay very high and that will lead, in my opinion, sometime down the road to more inflation, which will then necessitate more money-printing, in order to keep short-term rates artificially low.

Bright Future for Resources
I think that gold is a desirable asset, but for my taste there was a little bit too much euphoria just recently, when gold went over $1,000. And so what we could get is kind of a correction in gold, and then a little bit of a rebound in dollars.

The exploration companies were decimated in 2008 and they have recovered, but in my opinion, they still offer very good value. What has to be clearly understood is that exploration companies don’t really have a cash flow, and they have to discover something to make it work. Many exploration companies will not survive and others will be taken over by the majors. There will be a lot of volatility in the sector, but it’s an exciting sector.

I feel that the demand for resources overall is actually well-supported, and there’s another factor that’s important to understand. The bull market in commodities that began in essentially 2001 and lasted to 2008 was, in my opinion, too short to really trigger a supply response. Once the market collapsed in 2008, a lot of projects were canceled and a lot of exploration companies didn’t get the money they needed to carry on with their exploration work.

In the case of oil, the peak for new discoveries came in the 1950s and 1960s. Since then new oil reserves continue to be found but in smaller and smaller quantities, and also at higher and higher costs in areas that are inhospitable or very deep at sea.

When I look at the oil demand pattern of China and India and then I look at the supply pattern, I think that oil prices will have a rising trend. And here, leaving out the money-printing function of Mr. Bernanke, the more money you print, the more oil and other commodities go up.

Growing Clout of Emerging Markets
I have to say that, probably in our whole lifetime, we will never again have this kind of synchronized boom that we experienced in the period 2005 to 2007. It is most unusual economically that the whole world was in boom condition, and in the future, I would rather expect that some countries will do well and others will do less well.

For 200 years it was the
rich countries of the West that essentially became richer and richer, and for the first 150 of those 200 years, what are now called “emerging economies” were colonies and thereafter they had regimes that were not particularly desirable. But now these countries have been unleashed. In the past, the rich countries of the West financed economic development in poor, emerging countries. But now the foreign exchange reserves are in emerging economies.

I mention this because sometimes people still think that emerging economies are poor, or that the emerging economies depend very much on the West. That is no longer the case. They are a very, very powerful economic bloc, and they will become a very, very powerful political bloc as well, and a military bloc. And that is something that will create a lot of tension in the world

The strong economic development in Asia has obviously slowed down because we have a recession and exports collapsed. But Asia is not going to stop buying commodities. The Chinese have very little natural gas, they have little crude oil, they have very little iron/ore and copper. They may buy less in any given year, but there is not going to be a situation where they won’t buy anything at all.

Chinese steel production went from 10 percent of the world’s total in 1990 to more than 40 percent now. For aluminum, production in China went from 10 percent of the world’s total in the year 2000 to now more than 30 percent. That isn’t going to go away because a lot of this production is actually not for export, but rather for domestic consumption.

The per-capita consumption of oil and other resources in China and India is still extremely low compared to say more advanced economies, such as Japan, South Korea and, of course, the energy-wasting United States. That is shown on the chart below. I would argue that actually oil demand in China will have trend-line growth of between 6 percent and 9 percent annually for the next 10 to 20 years, and in India, trend line growth, in my opinion, will be between 5 percent and 7 percent annually.


Rise of the Asian Consumer
In China and in the whole of Asia and the emerging world, we still have a lot of poverty and we have a lot of people who can’t afford to live a very free life. In other words, they can’t afford to travel and they can’t afford to make many choices in their lives.

But at the same time, in both India and China, you have the emergence of a hardworking urban class — these are people who work for companies in clerical positions and also in management positions and they do relatively well. So if you have 1.3 billion people, all you need is essentially 200 million people that live a reasonable lifestyle and you have a huge market.

Over time, starting from a low level, these countries move up the scale in terms of standard of living. Their GDP per capita improves and the middle class expands. Now is everything perfect? No. And is the stimulus package in China working? Probably not very well. It leads to a lot of speculation and further reallocation of resources, bubbles in property and so on.

But I take the view that, if you look at the next 10 to 20 years, I don’t see how the lifestyle of the average person in Western Europe and in the U.S. will improve meaningfully. I just don’t see it. On the other hand, if I look at a country like Vietnam, it has GDP per capita annually of $800, which may go to $3,000 over the next 15 to 20 years. The same idea holds for China and India.

You will have in India a middle class of maybe 200 million or 300 million people. They will not all buy Mercedes Benz cars, but they will buy a Nano for $2,500. And that will require resources and it will eventually also be an incentive for people to work very hard.

When a family moves from the bicycle to the motorcycle, it’s an improvement in their standard of living. But then when you move to the car and you drive your children in a car to school, it’s a huge increase in your standard of living, and also in your social class. In the Western world, I think that they will be at war and they will have civil unrest and their standard of living will not be as good.

From US Global Investors


Worries as Rush Into Commodities Slows

(…)Investors plowed a record $50 billion into commodities this year, helping drive prices for crude oil up 79% and gold 23%, but just $2.2 billion of new money flowed into commodities in October.

[commodities etf]

On a quarterly basis, inflows into commodity investments have fallen from about $22 billion in the first quarter to $17 billion in the second and $11 billion in the third. The inflows already are more than triple those of 2008. On Thursday, gold closed at a record $1088.70 an ounce.

(…) But many investors are now worried the liquidity-fueled rally in commodities may soon be over. They say the weakness in the dollar, which has helped drive commodities higher, may soon come to an end.(…)

Barclays speculates some of the slowdown in inflows is also attributable to disappointment on the part of investors, who had anticipated they would be getting higher returns for commodities. Commodities typically are the first to rise coming out of a recession, peaking before stocks. But even though raw commodity prices have soared, many funds linked to those assets — exchange-traded funds in particular — have vastly underperformed.(…)

Full WSJ article

Be aware of the seasonality patterns:


For a lot more on commodities, hit “commodities” in my list of labels. And then, for a lot more on the US dollar, hit “currencies”.