by George Dorgan
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As we predicted on October 5 or one day later on DailyFX, metals have started their descent, silver lost one dollar, from levels around 35$ last week to 34$ now.
Marc Faber joins our view and says that asset prices are quite vulnerable.
“I’m not 100% in cash, for the simple reason that I could be wrong, but in general I think that people that have a heavy exposure to assets being that equities, or gold, or other commodities. I think they will face some profit taking here.”
The August and September price increases have already anticipated the inflationary effect of easing operations on metals and oil. Therefore we judge that these commodities should move downwards in the next one to three months.
The following factors play against rising metal and Brent oil prices:
1) Due to the excessive enthusiasm after the Fed’s and the ECB’s easing, we reckon that metals and Brent are overvalued. Gold has risen from levels of 1500$ to 1770$ in three months together with stocks. Silver was valued 27 $ in July, but 34$ now and might go for the death cross.
Silver Death Cross (source Ahraf Laidi)
Gold risks to see a similar formation like at the end of 2011, potentially also a death cross.
Gold 2003-2012 - Click to enlarge
2) As opposed to QE2, US funds will not flow into emerging markets (QE2-induced “currency wars”), but will mostly remain in the United States. The different type of easing via asset backed-securities in QE3 similar to the previous Term Asset-Backed Securities Loan Facility (TALF) helps that money stays in the country.
Prior Fed Easing Programs (source DailyFX)
Therefore QE3 could effectively help the US home prices to rise, whereas most of Europe sees contracting house prices (see the Economist). US unemployment may fall temporarily. This will limit the Fed’s QE3 intervention amounts and strengthen the dollar.
Against a quick fall of oil, but in favor of a weakening of gold and partially of silver, speaks the IS-LM model . It teaches that after easing operations, the economy will see 6 to 9 months growth (positive for WTI oil, negative for gold) and later only inflationary effects (rather positive for gold and negative for other commodities and stocks).
3) The over-supply in US housing and too many people under-water, will not generate sustainable GDP growth. Many people will prefer to pay down debt which will hamper retail sales. It will further fuel the US balance sheet recession and limit “foreign growth” of China and Europe via a positive trade balance with the US.
4) Increases in commodity prices are associated with global demand, especially from emerging markets. Emerging markets will continue to see slower growth, because they are obliged to generate an expansion via productivity gains this time, not by foreign investments as during QE1 and QE2.
(source Malaysia today)
See more on non-performing loans in Brazil and China, the slowing in the Chinese real estate market and high rising debt in Brazil despite high interest rates and other emerging markets (see picture).
The International Energy Association (IAE) doubts that Russia is able to have similar success with shell gas and oil as the United States. Putin himself
Opposed to what Marc Faber says, we think that Chinese food inflation is too high to give their policy makers big choices. Therefore increases of Chinese stocks will be limited.
Growth Emerging Markets 2001-2011 - Click to enlarge
5) Seasonal factors suggest that crude oil weakens especially in the months of November and December.
See our post on seasonal factors for oil. We judge that the WTI-Brent spread will narrow.
Average Price Change in Crude Oil per Month - Click to enlarge
6) Both stocks and the US dollar usually increase in the fourth quarter. Due to the QE3 enthusiasm, however, equities might have risen already too much.
Stock market performance per quarter - Click to enlarge
7) A stronger US economy will strengthen the dollar. That quantitative easing harms the buck will get forgotten soon. Since the global funding currency appreciates, a price contraction in metals and Brent oil will follow.
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Tags: asset prices,Brent Oil,China,Currency Wars,Emerging Markets,equities,food inflation,Gold,Marc Faber,OIL,QE3,Quantitative Easing,Russia,silver
