Gold will go up while commodities go down
May 21, 2006
I have been warning that volatility will increase since last year, but because most of the volatility we have seen thus far has been to the upside, it was ignored. Well, there is still more volatility ahead.
Metals prices have risen too fast and although unpredictable with respect to timing, a correction was inevitable. The increase in metals prices over the past several months may have been nothing more than momentum buying and short covering, which means we could see a bounce in the near future. However, this week's decline in metals prices could also signal the end of the bull market in commodities. I have written extensively about the fragile US economy and about how a slowdown in US economic growth will reverberate around the world -- leading to reduced demand for base metals (among other things) and hence a decline in base metals prices. The rise in base metals prices during the past six months may well have been the speculative blow-off that often occurs at the top of a market.
That does not mean base metals prices are going straight down; the market seldom goes straight up or straight down. But in my opinion, the bull market in commodities is either over, or very close to being over. Take note of the fact that equities markets across the globe have been getting hammered. Equities markets are typically forward looking and if they are turning down it could spell trouble ahead for the world's economic growth.
Renewed interest in metals from investors who have no comprehension of the difference between metal commodities and gold -- which is money, and not a commodity -- has contributed to the rise in the gold price during the past six months. The bad news is that the gold price is being dragged down by other commodity prices. The good news is that it is presenting a buying opportunity in the gold sector that I fully intend to avail myself to in the coming weeks.
At some point the correlation between base metals prices and the gold price should break down, after which gold should rise while base metals decline.
Paul van Eeden |
