The recent volatility in global financial markets hit the commodities sector hard on Monday, as hedge funds and other investors scurried to reduce their risky investments.
Nickel prices tumbled 5 per cent, while copper and zinc fell almost 3 per cent and gold prices traded at levels more than 7 per cent lower than before the start of last week’s market turmoil.
This repositioning is prompting some unusual price swings and heavy trading flows, particularly in sectors that have been the focus of risk-taking over the past year, such as credit derivatives, emerging markets and commodities.
“I don’t think anything has fundamentally changed for commodity markets. I think it is just a case of investors selling their holdings to pay for losses they may have incurred elsewhere,” said Kevin Norrish, commodities analyst at Barclays Capital.
An adviser to a London-based fund of hedge funds added: “The big theme of the moment is deleveraging and derisking.”
Over the last month or so I have written a few articles about a possible summer rally in commodities. See here and here. Both of these articles relied on technical analysis.
It's easy to sell TA as a "holy grail" of investing. This is the way it was sold when I first started reading about it in the late 1980s/early 1990s. However, I would strongly encourage readers to look at the writings of Gann, Gartley and Schabacker. All three wrote in the 1930s era and all of their writing provides the baisc underpinnings of modern TA theory.
All three also make the following paraphrased observation: the markets will make an ass of you whenever and wherever they can. And they are very good at making an ass of you, so don't get cocky.
This week's market action clearly highlights technical analysis' shortcomings. By relying solely on chart patterns without any fundamental knowledge of the markets a trader can get killed.
I think the following paragraph from the above article still makes sense:
“I don’t think anything has fundamentally changed for commodity markets. I think it is just a case of investors selling their holdings to pay for losses they may have incurred elsewhere,” said Kevin Norrish, commodities analyst at Barclays Capital.
India and China are still growing. That's a little under 2 billion people who are living in economies growing at 8% or more. They want stuff. As I wrote in one of the articles:
Remember we still have China and India on-line for very strong growth rates, increasing demand for base metals.
Fundamental analysis tells you what to buy.
TA tells you when to buy.
I will caution: it can all change tomorrow.
