Commodities rout over soon?

We had recently become concerned about the current liquidity crisis negatively affecting the commodities sector. Today's rout was a confirmation of this worry, apparently the result of investors liquidating commodities holdings to raise cash. As we are not traders, but investors, we continue to hold our position because we still believe the next several years will be favorable toward the precious metals and oil. There is no reason to let a few days or weeks of market action alter a much longer term plan.

Furthermore, an economic slowdown does not necessarily imply lower prices for these specific commodities. The reason we believe these holdings will perform well over the next few years is because the credit expansion leading up to the current state of the economy will likely result in the Fed acting to feed inflation further. Also, demand for oil will not just go away even if there is a global slowdown. If one recalls the 1970's, we had an economic slowdown with gold, silver, and oil rising in price, and not without some sharp corrections along the way. There is no reason to expect that this time an economic slowdown automatically means lower prices in these specific commodities. That is not to say that gold, silver, and oil are guaranteed to rise in price, but we think this is the more likely scenario and these positions provide safety from a likely weaker US dollar going forward.

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http://www.forbes.com/2007/08/16/commodities-oil-closer-markets-comm-cx_ra_0816markets48.html?partner=yahootix

“One of the things that’s happening out there with the turmoil in the financial markets is that hedge funds are clearing out their energy positions in order to free up cash and unwind their leverage positions in other markets.”

Arthur Hogan, chief market analyst with Jeffries, said the commodities market was sliding because of the assumption that there will be a global economic slowdown. “If that happens it would be intuitive to see a sell-off in commodities,” Hogan said. “Now it’s important to realize that doesn’t have to happen.”

The commodities markets are trading as if there will be a precipitous slowdown in global demand in India, China, and the U.S., but Hogan believes the slowdown will be more modest.