I think that the price of “stuff” will go up long term as the dollar continues to fall - and the dollar will continue to fall long term, as our government prints more pretty green pieces of paper. So why have commodities (gold, silver, oil, wheat, etc.) dropped so much over the past few days?
The short answer is that I don’t know. How’s that for sticking my neck out?
From what I’ve read and heard, it’s a combination of two distinct factors:
- The market had priced in a 1% drop in interest rates, and the Fed only dropped 3/4%. So traders think that the Fed is now hawkish on inflation. (Yup, I think it’s weird too.)
- The US is definitely going into a recession. That means that demand for commodities will drop as consumers spend less.
Of the two reason given for the drop, I’m inclined to think that #2 has more validity than #1. Not that I think that’s a bad thing! The US needs to spend less. The average US consumer is in over their head with debt. Collectively we need to stop spending more than we earn - and the same goes for the US Government. If the dollar is to rise long term, we need to stop spending more than we make.
We need to pay off old debt and stop taking on new debt for awhile. We need to accumulate capital so that our banks don’t have to drop their trousers and bend over for money from Sovereign Wealth Funds in order to stay in business. A little actual capital would have prevented Bear Stearns (BSC) from a buyout offer at $2/share. Of course, that was us (the US) doing the “buying”, but now we’re all on the hook for $30 billion of Bear Stearns’ over-valued mortgages.
I don’t know what the next shoe to drop will be - or how the markets will react to it. In spite of the fact that CIT Group (CIT) (not to be confused with CitiGroup as I did at first!) recently announced that they didn’t have any money on hand and needed to borrow $7.3 billion to stay afloat, the US stock markets all went up that day. And the commodities all dropped.
Side note: I like the headline on this CNN article: “CIT Borrows $7.3 Billion to Repay Debt“ I’m still trying to figure out how borrowing money to repay debt works….
Anyway, despite the news of yet another financial company having problems, the stock market shrugged it off and the DJIA soared 261 points. The ETF that tracks all the financial stocks in the S&P 500 (XLF) was up an astounding 6%! But I think that we’ll see this sector plummet at some point as this mortgage inspired credit crisis unfolds.
Remember that very few of the ARMs and Option ARMs that were handed out at the peak of the housing bubble (2005 through 2007) have reset to higher rates yet. A lot of those mortgage holders are making minimum payments on their interest only loans. This is far from over, and I’m hanging on to my gold ETF (GLD). I’m also buying silver when I find it cheap on eBay.
In other words, I’m using this drop in commodities as a buying opportunity. I don’t know about oil, wheat, or corn (they depend too much on the economy), but I expect to see a big rebound in precious metals sometime soon. And when that happens, I’m betting that the rebound in precious metals will coincide with a drop in the financials.