Gold and Silver Have Largely Missed the Commodity Rally

Not that I have an answer, but it is quite astounding that gold and silver are the only commodities that lag in the current commodity rally since mid 2007. While platinum's rise exceeds the expectations of the most bullish precious metals investors and has been followed by recent massive gains in palladium, gold and silver are the only exchange traded commodities that have not yet risen to new highs.

Silver is still far off its 1980 nominal high of more than $50/oz and gold has not seen the old real-term high that lies somewhere between $2,100 and $3,000/oz, depending on which inflation statistics you use.

GRAPH: Goldman Sachs Commodity Indices. The commodity rocket took off in mid 2007. All commodities? No! Gold and silver are the only two major exchange traded commodities (meat is weak too) that have not yet shot back to their inflation-adjusted alltime highs. I would categorize it with John Maynard Keynes quote that markets can remain irrational far longer than investors can remain solvent. Take back your leverage and fasten your seat belts for the coming catch-up process in gold and silver. Agricultural products have been outpacing all other commodity sectors and are expected to continue this trend. Coffee is below its old records too. Chart courtesy of Stockcharts.com

Don't get desperate, though. Christmas is still lasting for gold/silver bulls as the current underperformance will probably be the last chance to accumulate more of the metals at prices that will be called ridiculously low in hindsight.Platinum and palladium rally because of energy shortages in South Africa. Mines sometimes have barely enough energy to maintain their operations, not to speak of actual mining. This applies to gold mines as well! South Africa's gold production may fall off the cliff and gold still trades sideways above $900! Yes, this is christmas for all late-comers to the gold bull. Check out commodity charts. Almost all foods trade at or near their alltime highs.

A recent slump in base metals has given way to the more realistic view that China will build some 200 million apartments until 2020. Multiply 250 pounds of copper with 200 million and see yourself why the commodities bull will last longer.

Thinking oil prices are too high? Think again!

In China's northeast gas stations are guarded by police and sales rationed to 5 gallons per car. And yet there are several 100 million Chinese and Indian who have no bigger wish than their own individual means of transport!

Meats are the only significant exception in the current commodities boom. This is due to massively higher costs for raising the livestock. But as Chinese switch to a diet with more meat some killings may be made with cattle and hogs. Right now meat producers experience the worst of two worlds. Higher input prices and lower sales prices will lead to sharp moves in futures markets.

China has a huge impact on the gold market too. Gold demand rose 26% to 326 tons in 2007 YOY, outpacing a 12% rise in domestic production to 276 tons, leaving a deficit of 50 metric tons. China is now the biggest gold producer in the world but don't expect any production surplus from there anytime soon.

One last note: We have seen almost all commodities having their limit-up days. While both gold and silver display extreme intraday volatilities they have never seen a limit-up day in the past 28 years. Taking a cue from other commodities, this is a sign that these markets are nowhere near overheating anytime soon. Gold and silver still have to do a lot of fundamental catching up as Western investors have yet to begin to buy the physical stuff. Euphoria will only set in around $2,500. To know what it will feel like, read this story on the wild, wild days in wheat futures markets that took place last week.

Comments

[User 142738]

A couple of points of interest omitted from the article:
• Silver hit $50 because a couple of crazy commodities investors decided to corner the market, so don’t rely on that as a possible top.
• China and India fix the prices of gasoline (and most other commodities), which is why shortages exist.

[ussmls7]

The shorts have silver corner now at the largest ever recorded, why the regulators have turned a blind eye is anyones quess, but it may blow up in their face, then silver will never look back!

[Donaldo]

ussmls7 leaves me wondering what he/she has said. Please add some clarification here!