Commodity Boom Turns Bust in 2008
By - January 02, 2009

Commodity prices in 2008 plunged the most in five decades as demand for energy, metals and grains tumbled in the second half because of the recession. From July to December, the slumping economy drove crude oil, gasoline, copper, corn, and wheat down from records in the first half. In 2008, the Reuters/Jefferies CRB Index of 19 raw materials fell 36 percent, the most since the gauge debuted in 1956, to 229.54. It rose to a record 473.97 on July 3. On Dec. 5, the measure dropped to the lowest since August 2002. The worldwide economy crumbled last year. Home prices plummeted, investment banks collapsed and credit froze. U.S. consumer spending plunged, pushing the nation's automakers to the brink of bankruptcy. Growth in China and other emerging markets withered. "Macroeconomically, we're in a free fall," said John Brynjolfsson, the managing director and chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California. "That's a complete destruction in industrial production and demand, and this is likely to keep pressure on the commodity sector in general." – Bloomberg

Dominant Social Theme: Commodities are suffering like everything else.

Free-Market Analysis: Except maybe gold. Not so long ago, gold went over US$1,000, and is currently hovering far above US$800, up from a recent downtrend that carried it into the US$700s. So why doesn't Bloomberg prominently mention gold in its roundup? Isn't gold a commodity? Bloomberg and other reports can't seem to make up their mind about gold and silver. When prices are down, money metals are often treated like a commodity. When prices are up, they are just as likely to be ignored.

The bias in the mainstream reporting as regards gold and silver is obvious, to us, anyway. In fact, we have a suspicion (oft stated) that central banks and the principals of complaisant markets will do almost anything to keep a lid on precious metals. (Please note: this is not really possible!) In fact, we now have a divergence between the price of gold and silver on such informal spot markets as eBay and the formal markets of the financial industry. It is a crisis of supply. We suggest that prices have been kept artificially low for so long that that all-important supply-and-demand signals have mixed up providers. The reality is all around us. Mints are running out of gold and silver coins; premiums are being paid for gold and silver, including jewelry; ask to take delivery from a major exchange and you will eventually get your metal, but not always professionally delivered (or so we have read), and bundled in haste.

Now comes this Bloomberg analysis to provide more of the same ol' confusion. Gold was definitely NOT a bust in 2008. It held its own and is likely on its way back up again. Silver has had a more difficult time, but that could be because silver constitutes an even smaller market and therefore is even easier to manipulate, in the short term anyway. So, Bloomberg, what's the hot commodity? Cocoa. That's right, cocoa!

"Things are going to be a lot better next year than people think," Lars Steffensen, the founder and managing director of Ebullio Capital Management LLP, a commodity hedge fund based in Southend-on-Sea, U.K., said yesterday. "The U.S. is going to print the dollar to get out of the recession, and anything tangible, like industrial metals, is going to be worth more." Cocoa futures in 2008 jumped 30 percent to $2,665 a metric ton on ICE Futures U.S. in New York. A smaller crop in Ivory Coast, the world's biggest producer, eroded inventories, contributing to a global deficit. "Cocoa has the best fundamentals of any commodities, except maybe tin," Steffensen said. "They share a low-inventory story, straight deficits and limited ability for production increases, along with supply problems."

Notice how Steffensen brings up inflation and then says that the prices of INDUSTRIAL metals will rise as a result. In fact, industrial metals are usually a victim of the bottom line. Nobody is going to buy aluminum, zinc or even tin in bulk without needing to make things. But let inflation rise, and gold and silver will rise right along with it.

Gold and silver are MONEY METALS; they are stores of value first and foremost and commodities only insofar as they have industrial applicability. Let the world shut down, let industry fall fallow, let factories cease to function and people will transfer from devaluing paper to honest money – gold and silver. They will buy these money metals and hold them for their intrinsic value, for their beauty, for their historical functions as a safe haven in times of uncertainty. And while we are on the subject, since Bloomberg classifies money metals as commodities, first and foremost, then the article should have noted gold's performance. Well, OK, it finally does so, but only toward the bottom of the article, as follows: Gold futures rose 5.5 percent to $884.30 an ounce last year [2008] on the Comex division of the Nymex, marking the eighth-straight annual increase. The metal reached a record $1,033.90 in March.

That's enthusiasm for you! Here is a "commodity" that rose 5.5 percent last year and even reached a record price. In fact, the reporters had two choices. They could leave gold entirely; or they could mention gold – but only as an aside and only without any sort of interpretive gloss. They chose the latter approach, sneaking in the awkward news about gold toward the bottom of the article, like the uncomfortable cousin or uncle that people used to store in the attic.

After Thoughts

Pay no attention to the man behind the curtain!" as the wizard told Dorothy when she was looking in the wrong direction. Such analysis is irritating mainly because it is all too effective in terms of confusing the general public about precious metals. It won't make any difference over the long haul, but plenty of people will lose out because they've had it dinned into their brains that gold and silver are non-factors. Of course, they are not. 2009 may begin – again – to tell the tale. You may not read it at Bloomberg, however you sure as heck will here.