Commodity Markets Showing That Food Is the New Money

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Food is the new money. This doesn’t mean you can go out and spend a pocket full of chocolate. Besides, with today’s expected 40 degree heat in Melbourne, your money would melt before you could trade it for a beer. A bad trade.

Yet judging by the commodity markets, the purchasing power of paper money is falling relative to things. “Soybean futures in Chicago climbed close to a 34-year peak and corn rose to an 11-year high,” reports Jae Hur at Bloomberg. Platinum prices are also. It closed at US$1,563. 25 in London, a new high.

“If you just looked at it on a technical basis, it would be a sell,” chimed in our technical analyst and trader Gabriel. Gabriel is a former currency trader for the hedge fund industry. He’s from France, and had the good sense to leave both places for Australia and the publishing industry (actually we love France…it’s just very difficult to work from there in the financial industry.

He sits across the desk from us at the Old Hat Factory. “Of course if you are more familiar with what drives this particular market, you might make a different forecast, that it would be at $2,000 in two months,” he chuckled. “But based on the chart…sell.”

Gabriel is probably right. And the reason we’ve brought him on board at the Old Hat Factory is that 2008 will be a great market for traders. For very long-term investors, there’s little doubt in our mind that you’ll do well going long and staying long commodities for the length of the resource bull market. Metals and tangible goods are going to clobber financial assets.

The only real danger for investors is that the commodity markets could be hijacked by speculators. Platinum, for example, is in demand by the electronics and automotives industries. It’s also pretty popular to wear on your finger as a token of your intentions to love, honour, and obey the object of your devoted affections.

But what’s going to drive platinum and gold and silver higher is investment demand. Get ready for the fireworks.

Speaking of which, gold is putting on quite the show. February gold in New York closed at US$881.80. It got has high as $894 before gleeful investors took profits. You can see where this is headed, US$1,000.

The Australian dollar gold price already eclipsed $1,000 this week. Take that U.S. Dollar! Until recently, the strength of the Aussie dollar limited the gain of the gold price in Aussie terms. What we’re seeing lately is overall weakness in most paper currencies relative to precious metals.

On cue, local gold producers like Newcrest and Lihir soared. Our guess is that this is the warm up, and not the grand finale. Get some pop corn. You make even want to look at some mid-level gold stocks or juniors.

It’s been a few weeks since we looked at China. The news is mixed. From the department of the ominous is the news that Chinese IPOs are taking. According to the U.K.’s Independent, “The China IPO (initial public offering) indicator tracks the price of shares listed on the Shanghai, Shenzhen and Hong Kong markets. The latest calculation of the index, for November, shows that the Chinese markets gave up most of their gains from the summer, “demonstrating a growing belief that Chinese equities are overvalued and fears of tightening monetary policy to control inflation”, according to Xinhua. Of the 118 equities included in the previous two months, 15 increased in price and 103 fell.”

China’s equity market is obviously in a bubble. But animal spirits are hard to contain once they get going. This is true in all markets everywhere throughout history. And besides, why keep your money in low-interest rate savings in China when you can do better in the stock market? China’s financial market for gold is taking off, too.

Adrian Ash, our old desk-mate from London, reports in his research note from the Bullion Vault that, “China’s new gold futures market leapt 14% on its debut, breaking through the Shanghai Futures Exchange’s daily price-limit on turnover worth $2.75 billion.

“The contract size of these new gold futures was earlier set at 1,000 grams – three times greater than first planned – in a bid to deter smaller investors. But one Shanghai futures brokerage told the People’s Daily this morning that private individuals have made “mounting enquiries” to enter the gold market regardless.”

This time last year we speculated that the world’s stock markets and commodity markets were on the verge of a massive inflationary melt up. Then came the sub-prime credit crunch, which has bisected our forecast. Financial stocks have been cut out of the melt up as credit conditions stagnate. That concentrates rising prices in commodities, especially agricultural commodities, particularly grains.

What do you want to bet that wheat outperforms platinum this year and soybeans outperform gold? Keep your eyes on the commodity markets in 2008.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. ““If you just looked at it on a technical basis, it would be a sell,” chimed in our technical analyst and trader Gabriel. Gabriel is a former currency trader for the hedge fund industry. He’s from France, and had the good sense to leave both places for Australia and the publishing industry (actually we love France…it’s just very difficult to work from there in the financial industry.”

    How can this guy consider himself a technical trader?

    Reply
  2. i see a peak at 1650 and
    a bottom at 1275…..{imho}

    nb: obviously subject to revision.

    Reply
  3. boy, screwed that one on the charts. didn’t do fundamentals.
    mining output down %20 for 2008

    Reply

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