The Great White North

• Print
• E-Mail

"Investors, and speculators in particular, may need to brace themselves for what could develop into savage changes in commodities prices, according to the latest advice from the Bank Credit Analyst. "The changing behavior of commodity investors and speculators increases our conviction", states BCA Research, "that the asset class is on an eventual path toward a mania-like overshoot".

Gold bullion may just turn out to be the "litmus test" [for such an overshoot in commodities] report the BCA.

In recent research, analysts at Royal Bank of Canada Capital Markets note that a record increase in the net speculative long gold bullion futures position on COMEX coincided with the run in the price of gold, to a record $1,030/oz early last month. On February 22 2008, the net long position in gold bullion futures reached an all-time high of 25.3moz before pulling back to the current 19.3moz level.

RBC CM analysts anticipate that the high positive correlation between gold bullion and the speculative futures position will continue, and are looking for the long position to decline possibly as low as the 8-10moz level, before gold consolidates and makes another run at $1,000/oz in August-September 2008. Based on the ongoing positive supply-demand fundamentals for gold, the analysts believe it's unlikely the speculative gold futures will decline to a net short position in the foreseeable future.

BCA Research notes that the growing interest in the overall commodities asset class was evident during the run-up to the current pullback, "which was very different compared to the past ten years". First, commodity prices peaked at a time of near record speculative long positions (net speculative long buyers were only higher in early 2004). Second, there is anecdotal evidence of record inflows into "commodities as an asset class" in the first two months of this year.

Third, so-called open (mainly speculative) interest accelerated higher at an unprecedented pace (that is, the supply of futures contracts was "forced" to increase to meet overwhelming demand). For BCA Research, the bottom line is that it's "impossible to know how the current correction will play out". What is clear to the analysts is that commodity investors and speculators are gradually getting conditioned to "buy the dips", even if value is no longer attractive."

We need not dwell on the dangers of such conditioning and complacency, eh?

Catch us live on BNN TV this afteroon at 16:45 hours. Should be fun.

On a final note, if you are interested in silver (and who isn't these days?) and want to get the real picture of what is going on in that market, do yourself a favor and make a small investment into the CPM Group's 2008 Silver Yearbook, set to be released on the 29th of the month. Rather than trying to decide which particular silver pundit may be in possession of the correct set of facts regarding current market conditions, you now have the opportunity to go straight to the source that actually gathers and dissects data for a living and learn the hard numbers and actual trends in the metal. You will find the book available here: http://store.cpmgroup.com/