Sandeep Daga

Copper ETFs: How China Controls Their Fate

Copper scrap has been a big leveler to metal price. Fall in industrial activities and steep losses to scrap traders have helped reducing supply of this alternative which has complemented rise in metal price. However, recent rise in prices has been helping supply side responses: Mines are opening up and scrap availability is rising too. This is happening at a time when Chinese demand for stock-piling is fading. A typical cyclical feature. Game is not in the hands of China anymore; funds are playing their positions and prices are gradually diverging from fundamental demand-supply once again. Analysts predicted 1mio T of suplus this year, despite Chinese stock-piling plenty is available. Seems we have wowed China too much; music needs to stop as early as possible else many will find themselves chairless, once again.

Preparing for the Dollar's Next Down Cycle

The current rally is indicator of how lopsided the world had become recently. Flipping history books to explore depression, listening to Roubini or George Soros, lagging indicators like unemployment hogging media limelight - we had got too much carried away. I expect a long pause and stabilility before next wave picks up.

The current wave indicates re-stocking. Re-stocking by commodity consumers and traders who have got rid of high priced ones recently and have been running hand to mouth. Re-stocking of commodities by countries like China and South Korea for better times ahead and also as to partly diversify away from US Treasuries. Re-stocking by hedge funds who have been sitting on no-yield cash for quite sometime. Re-stocking and cautious value-picking as rationality takes control.

However, market seems to be equally divided over the current rally as a bear rally or beginning of a bull turn. Quite blurred at the moment. I am keeping powder dry.

Seeking Signs of Recovery

The speed of decline has slowed but decline is yet a reality. Credit spreads are still quite tight, baltic index is falling again, housing prices have yet to show a definitive sign of stabilisation, East europe is in big trouble and commodities are rallying purely as one-off effect of China stimulus plan. Summers are, typically, featured with strengthening dollar and falling interests by Longs - I do not see why this is not a possibility this year. Charts of 1930s and 1979s suggest that we are half way through. A 'V' shaped recovery is not realism after having expected arrival of "Depression" not too long back. It is too early to hurrah !

Is Fiat Money the Real Culprit?

Fireball,

I respect your views but differ on a few points.

I think all of us see US Dollar as representative of Fiat money. This conception is wrong. There is a specific structural problem in US which doesn't have a solution in monetary policies. This fact needs to be isolated from the discussions of fiat as a currency system. Even asian countries have fiat currencies, but they are not suffering the debt bubble problems unlike US despite having gone through similar cycles. The problem is not in the Car, but with the driver.

My fundamental argument is two fold that Cycles are indispensable and desirable; Gold does not recognise this. Secondly, there is the logic in tying Gold production with GDP growth - the two have different forces.

Upside in Emerging Markets: Brazil is Bouncing

It's time to seriously relook at decoupling thougths. Similar trend can be seen in China and India. If you restrict BRIC to BIC, I think good time to get back to the tigers of world growth in the next wave.

Is Fiat Money the Real Culprit?

"Similarly, deflation for the reason you note above isn't inherently bad. We've seen deflation combined with high profits and development in areas like consumer electronics throughout the past few decades."

I think that consumer electronics have flourished amid declinign prices mainly due to technological innovations. Falling prices of electronics without introduction of new products would not have encouraged business investments in this sector. Compare this will commodities like Copper, Steel where bear markets have stalled business investments stalls for years together. The difference is whether deflation a bye-product or driver.

The one that is talked about in the article is asset price deflation. Gold standards are quite incapable of addressing this. Actually, Gold standards are not well equipped to handle cycles.

Price and Return: Bonds vs. Stocks

Good analysis. Such analyses suffer from the basis risk. The returns could look entirely different when analysed at different points in time. The comparison could have strongly favoured Stocks in Oct07. I think two things are quite important:

One - rather than comparative point-to-point return it will be interesting to see the comparative performance in rolling returns. I would imagine equities over-performing bonds more often and for more time than vice versa.

Two - whether equities are real representation of our prosperity and wealth. Despite a lost decade in equity returns, world GDP shows a positive report-card in last 10 years growth even after incorporating projected contraction. This means that as an individual and businessman we are better off than 10 years ago. The real economy has propelled further for sure; equities neither reflected the fundamentals in Oct07, nor do they now.

Is This a Sucker Rally or New Bull Market?

Although housing market is mother of credit crisis, the equity market has not always sung songs with housing prie trend. Equities rose in 2006/7 despite correction in housing prices. The credit trap is main problem and could take time to stabilise. Charts of 1930s and 1979s suggest several such bear market rallies forming base in 2-3 years. Traders are welcome as investors sit on the sidelines. I would keep myself away from the discussions whether bottom has been seen.

Unemployment is a lagging indicator and in on way helps predicting the next wave.

Copper's Climb Eases Deflation Fears

Copper's latest rally is inspired by increasing Chinese imports and rising metal premiums - driven by huge stimulus package in China. Besides, strategic stockpiling has helped a wave of re-stocking by traders and consumers. Q1 is typically good for metal demand in China as banking credit starts to flow back. However, China consumes only 20% of world copper production. With export not showing sign of recovery, domestic consumption driven demand may not fly too high.
I would expect a slogging summer with LME prices falling back to 3200/3300 levels in the back of falling equities and strengthening dollar. It is too early to hurrah ! Keep an eye on Baltic Index.

No Reason to Fear the IMF Gold Sales

IMF selling, if it at all takes place, will certainly keep a cap on the prices. Why would China buy gold now, when it can buy it cheaper after Gold comes under selling pressure. Their strategic reserve plan for most of the commodities are quite thoughtful and they wait for good buying times.
In any case, the moot point is that Gold has not appreciated as much as one would expect in these times. I feel that the reason for this puzzling phenomenon lies in the amount of panic. Investors and savers would sleep with cash below thier mattresses if the panic is extreme in stead of buying any asset class. Additionally, process of develeraging required increased availability of cash or fiat currency; gold may not have helped in the process - so why buy it.
I follow a thumb rule for gold - buy in September, sell in March. Examine historical charts and you will find for yourself.

The Tide Has Turned

Panic has receded but it doesn't mean good times are back. Stability needs to return. But the old problems are not over yet. If printing money is cure to all problems, no problem is big. Let's face it, business confidence is crushed so badly - even in Aisa - that just cheap may not help. It needs healing of time. Corp results are waiting. Expect a slogging summmer ahead.

Treasury Will Be Funded By the Printing Press

As you rightly pointed out - record low interest rates, rising inflation expectations, likely fall in dollar, falling trade surplus of creditor countries and attractiveness of other asset classes will constraint usual flow into Treasuries. Cenbanks may not have options but they are thinking hard. China is providing swap lines to Latin Americans; China and South Korea are building strategic commodity reserves; Japan is buying domestic Corp bonds. Diversifying away from US has been picking up and could gather momentum in months and years to come. Printing machine in one country and "real" growth in others - this is the mother of all bubbles and most of us realise this. World will find way out; if not - it will implode.