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Author has a degree in Engineering and is an avid investor in the market. Experience in industrial materials and structures. In college studied atomic & nuclear physics as well as material engineering. Eastern European
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  • Not a Coincidence that Bond selloff has led to many stocks gaining 100% or more the last 2 weeks. 0 comments

    Moneyflow is shifting from Bonds to Stocks and these last 2 weeks is just a glimpse of what will happen in 2011 with more bond money switching over to the stock side.

    Bond sell off add another dimension to commodity investments Saxo Bank Wed, Dec 15 2010, 07:08 GMT
     by  Saxo Bank Strategy Team  - Saxo Bank

    Several bond markets suffered the biggest two day sell off in two years this week as investors were reminded that low interest rates are not going to stay with us forever.

    Since the US Fed announced the latest round of quantitative easing bond yields in places like US and Germany have risen by more than quarter. The latest trigger was the announcement by President Obama that tax cuts from the Bush-era would be extended thereby increasing the US budget deficit by another 700 billion dollars.

    Recent economic data is pointing towards a continued global recovery in 2011. This will put the zero interest rate policy into question sooner rather than later and as such could change how different investments, such as commodities, will be viewed. Forward inflation projections have begun to pick up again leading investors to ask for a higher return on fixed income investments.

    China has put forward their monthly dose of economic statistics with the inflation data expected to trigger more policy tightening. A property bubble has developed during 2011 and with a recent report indicating that new homes in several cities are overpriced by 50 percent it is clear that the government will attempt a soft landing by increasing the cost of borrowing further.

    Commodity markets have generally rallied strongly during the first week of December as forecasts for 2011 points towards another strong year for the sector. New highs were seen on gold and WTI Crude moved back above 90 dollars for the first time in 26 months.

    Commodity Update

    The best performers over the past week has been cocoa due to the uncertainty surrounding the recent election in the Ivory Coast, copper due to worries about supply deficits in 2011 combined with the launch of ETFs and natural gas once again due to seasonally cold weather.

    WTI crude followed the European Brent above 90 dollars this week reaching 90.76 before traders realized the air had become a bit thin resulting in a quick three percent retracement. On this move we finally hit the fifty percent retracement of the 147.27 to 33.20 sell off. Interestingly it took 97 days to sell off and now 663 days to retrace half of that move.

    Commodity Update

    The ten dollar strong rally since mid November has come about at the same time as the dollar has been strengthening making the increase particularly hard felt by users in local currency. The main driver continues to be the move towards tighter market conditions as the global demand has increased at the strongest rate for 30 years. This increase in demand, which have been noticed especially over the last quarter, have resulted in the spot price moving above forward prices for the first time in two years.

    Reduced liquidity ahead of year end could trigger increased price volatility as positions are being trimmed. OPEC which supplies 40 percent of the world’s oil will meet December 11 with no change expected at this stage. This is despite the price having moved to the high end of their comfort zone. On the price negative side we await news on Chinese steps to reduce inflation and the European debt situation which remains unresolved. Events supporting prices are the North Korean situation and forecasts for further cold weather ahead.

    Gold and silver just like crude oil rallied strongly early on reaching new highs for the year before investors booked profit taking the two down by four and nine percent respectively. Gold made a new record high while silver came within five dollars of the 35 level reached in 1980 when the Hunt brother’s singlehandedly tried to corner the market.

    Commodity Update

    Silver on Monday reached the strongest relative level versus gold in nearly three years. Back in August one ounce of gold cost 68 ounces of silver and on Monday this had shrunk to just 48 ounces. Whether this outperformance will continue is a big question as the outlook currently favors gold. For now this will be a directional play as silver tends to outperform during rallies and equally underperform during corrections.

    Copper is another commodity making a new record high. This comes amid worries that global supply will fail to keep up with demand as the global recovery continues. US demand for copper in Q3 2010 was the strongest in two years and it comes at a time where a significant amount of supply has been diverted away for investment purposes ahead of the launch of physically backed exchange traded funds.

    Last week wheat showed the way as wet weather in Australia was hurting crop quality. This week attention has returned to corn on rising expectations for tighter supply estimates in Friday’s government crop report. Strong ethanol usage combined with projections that U.S. supplies will reach a 15 year low next September has lifted prices higher from the mid November correction. The speculative long corn position is still the largest among any of the agricultural markets which could attract some end of year profit taking should the crop report turn out to be benign.

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