Commodity crash - worse than 2000 tech bust

Quote from Cutten:

I think the price declines can't be explained by the exit of speculators alone. That would have caused a normal 1/3 correction, a bit like stocks in 1998 or 1987, or even the nasdaq in spring/summer 2000, not a historic price bust of 70% in less than half a year. Also it has been very fast even for a speculative unwind.

IMO the size of the fall is because you had the exit of speculators immediately followed by a catastrophic liquidity crunch and real economic slump - not just in the west but the periphery (BRIC). Any one of those factors alone could have caused a typical 25-35% bull market correction/mini-bear. Having the unwind, liquidity crunch, AND worldwide recession emerging simultaneously is what IMHO turned a 25-30% fall into a historic 70-75% rout. Remember, even the CEOs of the bustout financial blue-chips had no idea how bad their firms would get - and they were the ones who wrote the CDS and other stuff.

I remember in late 2007 and early 2008 thinking the potential slowdown recession could cause some problems for commodities eventually, but as long as they kept rising I was happy to play the trend - albeit with a stop. However, despite being a bear on the western economies, I didn't anticipate anything like the carnage we got in September and October. I think even the most bearish commentators have been surprised how bad things got.

The commodity producers themselves have clearly been caught out. Not just by the slump in prices, but more importantly, the collapse of credit. You see companies like CHK and PBR - massive blue-chip players - who are now having to liquidate assets (into a huge slump - horrible timing) because the credit markets have seized up. Many such firms just assumed bank credit would always be available, and have been badly caught out and some may even default.

I think it just shows the importance of risk control, and planning for surprises and extreme scenarios. If you didn't have a stop, or some protective puts, then you got raped. No matter how much conviction you have, there must be a point at which you say "Ok, the market isn't doing what it should if my idea was right - I had better start reducing my positions."

I agree that without the major financial panic, the boom would have continued into the "bubble stock" phase. I think that caught a lot of people out, including me, they assumed the party would keep going with only normal 20-30% corrections until you got to the bubble phase - shoeshine boys, hole in the ground companies etc. That was what happened with prior bubbles like tech in the 1990s, and real estate in the 2000s, stocks in the 1920s etc. Just goes to show that even a reliable playbook doesn't work all the time - you need a plan B just in case.
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PBR is one of my favorite long term plays.
 
I can understand where you are coming from...in the sense it is reasonable to make intelligent assumptions as to what the commodities performance should reflect.

I generally like to be one step behind the clever players and basically say, "show me"...using their money /investment to support a market.

The sugar situation is an interesting debacle as a number of buyers are reneging on contracts of future supply, thereby keeping prices somewhat "contained".

It sort of reminds me of the games the Pakis used to plat with coal shipments and shrinkage (forestalling delivery)...the end result it cost them more, and how!!!
 
It appears commodities as a class as still about 30% above the long-run average throughout the 90s and into the early 2000s. Is there a compelling argument for commodity prices to *not* return to those levels?
 
"The world is full of kings and queens who'll blind your eyes and steal your dreams" - Black Sabbath

Have you tried to buy spot lately? The "slump" in commodities appears to be largely a "paper" thing. ACTUALLY GO AND BUY SOME GOLD, SILVER, PLATINUM OR PALLADIUM and then tell me about the drop in commodities - that is right - go to a coin dealer and try it! You won't believe the COMEX crap again ;-) For what its worth, a few months ago, when I went in to a coin dealer to buy some platinum or palladium - I was told I couldn't even order any! Gold or silver - I could order - but several weeks (to several months) for delivery.

You might want to check out the "rumors" out there about "December defaults on gold delivery" ;-) Oh, and by the way...see if you as an individual investor can "take delivery" on one of those gold or silver contracts...you may hear something about "economic interest" and be handed a "can of fluff" instead of the gold or silver you were going to "take delivery on." Believe me - I thought about it...but, then when you read the fine print on some of those rule books (not mentioning exchange names here - you dig and find out for yourself!), you may not try to play the "I buy some futures, take delivery and divide it up and sell to the spot market" type game - do a little research, you'll see. The spreads between ACTUAL spot and "electronic" spot are LARGE - but the "barriers to entrance" leave out the "little guy."

-gastropod
 
Quote from gastropod:
You might want to check out the "rumors" out there about "December defaults on gold delivery"
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I've been hearing some variant on that rumor for nearly 20 years. I'm sure there's guys older than me here who've been hearing it for even longer.

Do you have an argument for why this time it's different?
 
Quote from Random.Capital:

Do you have an argument for why this time it's different?
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No, he has no argument, because he's trying to make the correlation that some small time coin purchaser unable to locate some buffalo's that the mint stopped minting is a sign of a shortage. silver/gold > 1k oz you can buy all you want. retail shortages aren't a sign of anything but big margins to be made.

take those gold-bug websites with a grain of salt gastropod. never heard so many cry-babies calling manipulation in all my life. fwiw, i think it's potentially a great emergency hedge, but let's get real here.
 
Quote from propseeker:

No, he has no argument, because he's trying to make the correlation that some small time coin purchaser unable to locate some buffalo's that the mint stopped minting is a sign of a shortage. silver/gold > 1k oz you can buy all you want. retail shortages aren't a sign of anything but big margins to be made.

take those gold-bug websites with a grain of salt gastropod. never heard so many cry-babies calling manipulation in all my life. fwiw, i think it's potentially a great emergency hedge, but let's get real here.
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propseeker, I hear what you are saying, but I couldn't even order platinum or palladium. Yes, there is the f'ing bs out there about, "Well the little investor seeking under 1,000 oz. Ag or 100 oz. Au can't find any, but that is not a sign of shortage" - bullshit! If the spread is high enough - how much would it cost to convert two 5,000 oz. bars of silver into 10,000 one ounce bars or silver rounds? Maybe a buck or two per ounce....and the spread is like $10/oz! Why not do it? I would!!! Have YOU ever gone and take delivery on gold or silver? I would love to know your experience with it! Straight up - the rule books have scared me off - they can "deliver" something other than what you bargained for - you would be out. Yes, I have read the rule books.

As to the "rumors" - I labeled them as such. I do not feel obligated to delineate a search for anybody ;-)

-gastropod
 
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