Bruised Commodities And The Expectations Game


That loud “crunch!” sound you heard on Thursday was the sound of falling commodity indices.  For trading ending May 5th, a wide range of commodity prices tumbled, with declines ranging from “not too bad” to “that’ll leave a mark.”

Gold, which hit a YTD high of $1551 on May 3rd, fell as low as $1462, WTI oil dropped below $100 for the first time since Saint Patrick’s Day and silver collapsed by 30.3% from its nominal 31-year high on April 25th.

Whence Thursday’s full-on whacking?  Well, it’s complicated . . . not to mention volatile.

For starters,the European Central Bank left interest rates unchanged at 1.25%, kick-starting a faltering US dollar.  First-time unemployment claims came in much higher than expected, at 474,000 and ADP projected a meager 179,000 new private-sector jobs in April.  Then the DOE reported the biggest oil stockpiles since October.  This prospect – a slow-moving recovery in which Americans cut spending on energy (and by implication cut spending on travel, discretionary spending and more) – was enough to spook energy traders, just as the CME Group imposed new margin restrictions on what had been a white-hot silver market.

That was Thursday and even Friday’s surprisingly strong jobs report wasn’t enough to stop the fibrillation.  After brief rallies, oil closed under $100, and silver lost another couple of bucks as stocks rose.

The unpleasant truth, at least for silver, is that the kind of unusual price spike we’ve seen over the last few months is just that – unusual.  In fact, it’s extremely unusual.  Plotting out nominal silver prices from January 1975 to May, 2011 reveals two – and only two -superspikes in silver prices – during the winter of 1979-80 as the Soviets invaded Afghanistan and the current frenzy.  And this sketch doesn’t even try to adjust today’s prices for inflation.

Gold’s recent history is a bit different.  The same date range produces a similar story at the end of the 1970s.  But the spike-and-collapse track wasn’t comparable.  Silver may have fallen to 1/10th of its peak price, but gold fell only to about half of its peak, and then swung gently to and fro in the $300-$500 range for more than twenty years.   Only in the mid-2000s did the big climb begin, and even then it contained plenty of volatile fizz.

What were the expectations of those who rushed into precious metals over the course of the past six months?  A knee-jerk response might be “a quick buck”, judging by the number of full-page newspaper spreads, online ads and radio spots flogging the value of gold and silver as investments.

Naturally, there’s more to it than that.  As a hedge against inflation, precious metals can and do make sense.  And despite the most authoritative of pronouncements, inflation – from the gas pump to the dairy aisle – is very real.  But as the past 35 years show, at least for individual investors there have really been only two strategies – buy and hold for a very long time in the case of gold, or hang on for the ride of your life after waiting even longer in the case of silver.


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