A Peek at The Peak?

Less than half a day after Iranian President Ahmadinejad categorically refuted the idea of a war with Israel or the US, his country fired off nine test missiles, staging its own 'rehearsal' for something. The event brought geopolitics back to the forefront in markets overnight and oil climbed nearly $1.5 ( to $137.55) on the news, while gold prices halted their decline near the $915 mark. Speculators hearing one tilt in Iranian rhetoric but seeing quite another in its actions decided that the safer play for the moment is either not to let go of a larger part of their positions in the two commodities or to perhaps buy a few additional units - just in case.

The US dollar fell away from the 73 mark on the index to hover near 72.82 and 1.57 against the euro. The markets remain nervous, as gold has not been able to register much progress to please the longs and as the near $10 drop in oil has its shorts beating the (oil) drums louder and louder. In other news, industrial giant Siemens plans to cut 4% of its global workforce in a sign that whatever growth may be achieved worldwide in coming months, it will likely be fairly feeble.

New York's mid-week gold trading session opened a bit on the indecisive side, with bullion orbiting the $920 level and showing a $1.20 loss at $918.50 as participants remained at threat level orange on the oil and dollar watch following the Iranian fireworks display. The economic calendar offers mortgage applications and consumer confidence numbers later in the day, but the focus will target the US (and possibly Israeli) response to Iran's pyrotechnics. Military analysts feel that the country could not undertake much more than hit-and-run missions designed to destabilize oil shipments in the neighborhood whilst it would be the target of heavy pounding by US forces in the region. For the moment, we will take the exercise as a 'me too' display of body language and go with Ahmadinejad's dovish words.

Silver was up 7 cents at $17.85 while platinum recouped very little of if its Tuesday losses by rising $5 to $1944 and palladium gained $5 to $442 per ounce. Market analysts peg platinum's support near $1920 after it hit a two-month low yesterday, following growing concerns about the automotive sector's ability to demand the amount of noble metals previously anticipated. Economic barometers in the US and elsewhere have lately been pointing to "cloudy with a chance of deeper slowdown" and have sapped a good deal of vigor out of the hitherto bubbly commodities complex.

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Our good friend NIck Godt over at Marketwatch in New York, wrote what is sure to be a heavily-read article overnight and we chose it for our focus story today. While the debate will continue about the central theme of Nick's story (it has already engendered 140 comments) the undeniable reality is that these markets have been exhibiting all the signs of a pivot point since at least March and that the expectations and positive factors that they have built their previous rallies upon have become far less dependable of late. Here is something to sink your teeth into for the day:

"After rallying to new stratospheric levels through last week, the price of crude oil and of other commodities prices has been sliding rapidly over the past two sessions, raising the question: Have commodities peaked?

"It's certainly possible," said Paul Nolte, director of investments at Hinsdale's Associates. "I think that we're in the early stages, and we could see a drop of 20% to 30% from peaks in energy prices, and energy has been the poster child for other commodities."

On Tuesday, crude oil prices tumbled over $5, their biggest daily decline in nearly four months, to close at $136.04 a barrel. In just two sessions, crude has lost $9.25, or 6.4%.

"We were way due for a correction in oil," said Frank Holmes, chief executive of U.S. Global Investors.

Holmes, who has been and remains very bullish on commodities mostly because of insatiable and growing demand from China and India, still believes oil can fall back to $100 a barrel but remain in a rallying mode overall.

Other commodities have followed along in the two-day slide, starting with food futures. Corn futures fell sharply for a third day Tuesday, losing over 3% to $7.25 a bushel on the Chicago Board of Trade, followed by big drops in soybeans and wheat futures.

Possible causes for the declines are plenty, including a firmer dollar, a weakening U.S. economy that is hitting demand, and Congressional efforts to bring down gasoline prices ahead of the U.S. presidential elections. But whether or not oil and other commodities are experiencing just another correction in a bull market, or a lasting reversal, remains an open question. Many market strategists simply point out that no market can keep rising to new records in a straight line.

"Even a 20% to 30% correction would take a long while to unfold and only if we continue selling off after that will we know if the commodities bubble is over, just like what we saw in technology in late 2000," Nolte said.

Last week, crude oil prices hit a record $145.85 before sliding over the last two sessions. Through the first of half of the year, crude had surged 46%, including a spectacular 38% gain in the second quarter and a 10% advance for the month of June.

"When something is unsustainable, it has to give in," said Barry Ritholtz, director of equity research at Fusion IQ. "With oil prices nearing $150 a barrel and looking as if they were headed to $300, we're in a situation where at some point it hurts the economy and demand destruction weighs on prices."

Besides oil, many other commodities rallied this year, starting with food. The price of corn futures jumped 21% in June, gained 28% in the second quarter and surged 60% in the first half of the year. Among precious metals, gold jumped 11% in the first half of the year while silver was up over 17%. Among base metals, copper jumped nearly 28%.

But it's oil, along with gasoline prices, that have made headlines around the world. Besides the fundamental factors of supply and demand, oil also tends to gain when geopolitical tensions rise and disasters, such as hurricanes in the Gulf of Mexico, threaten to hit production.

"All we need is one headline and crude oil would be back up $5," said Bill O'Neill, managing partner at Logic Advisors.

The recent two-day slide just takes the edge off huge gains in commodities so far this year, a trend that keeps many strategists cautious on calling a peak in prices.

"There's some room for a near-term correction but we can't say the commodities bull run is over," O'Neill said. "We have seen two or three such corrections over the past year. It's vastly premature to reach the conclusion that this time commodities have topped."

Yet some analysts see room for things to be different this time.

On the one hand, after sliding over the past year the dollar has stabilized since March and began firming in late May. A firmer U.S. unit pressures dollar-denominated commodities, such as crude oil, because it makes them more expensive for holders of other currencies.

"I have been a dollar bear ever since the fourth quarter of 2001 but I'm no longer bearish," said Jeffrey Saut, market strategist at Raymond James. The strategist noted that, since 2002, the dollar has now fallen over 40% against its major rival the euro. Saut has also been and remains a long-term commodities bull. But he believes that the commodities bull run may have run out of steam, even if only temporarily. The main factor shaping his view is the approach of the U.S. presidential elections in November.

"There is a lot of nervousness, especially in energy pits, about the efforts underway to propose wrong-footed legislation from politicians who want to bring down the price of gasoline," Saut said.

"I don't believe we have a speculative bubble, but these moves are going to drive a lot of hot money out of commodities pits between now and the elections," he said.

Meanwhile, some analysts, such as Robert Pavlik, chief investment officer at Oaktree Asset Management, believe the sell-off in commodities and commodities-related stocks, can provide a good entry point for long-term investors."

You decide. This tug of war between camps is sure to yield sufficient volatility for the rest of the year to keep everyone entertained - even if someone has to lose $$$ in order for others to make $$$$ playing the opposite side. The period following the summer doldrums and vacation time should be closer in flavor to "Survivor" than to "The Price is Right" in our humble opinion.

Stay on alert for geopolitics, and the usual suspects in the energy and currency pits. Fed jawboning may yet filter into the markets, adding to the equation. The range (for the moment) remains $910-$930 for gold following a wobbly first half of the week.

Happy Trading.