Commodities accumulators panic – from Vienna to Zurich

<p>Yesterday we mentioned the possible repercussions of reduced asset accumulation by oil-exporting nations’ sovereign wealth funds from falling oil prices. If oil exporting nations sustain […]</p>

Yesterday we mentioned the possible repercussions of reduced asset accumulation by oil-exporting nations’ sovereign wealth funds from falling oil prices. If oil exporting nations sustain further oil price declines, then to what extent would this affect demand for global equities? Today’s question whether a broadening risk of deflation can be diminished by this week’s OPEC summit and Swiss gold vote.

CRB’s commodities break

The fact that the accumulators of the world’s key commodities are gathering this week in Austria (OPEC on oil) and Switzerland (Swiss vote on gold reserves) to rein in a sharp decline in their valued resources is a manifestation of rising deflation risks emerging from a strengthening US dollar and a slowing Chinese economy.

Year-to-date, the Reuters/Jefferies CRB Commodity Index is down 5%, and as much as 15% from its June highs. Admittedly, the index is more weighed towards energy commodities than to metals and agricultural commodities. But the technical break of the CRB’s 30-month trendline (green support line in chart), portends further declines below the 260 level.

The year’s worst performing commodity sector has clearly been energy, led by brent’s 29% decline, followed by gasoline and WTI crude at -27% and -24% respectively. Among metals, silver is the worst performer at -15%, followed by platinum, copper and gold at -11%, -9% and -0.4% respectively. The agricultural swoon is highlighted by plummeting prices of cotton and soybeans at 29% and 20% each.

PBOC cut, OPEC cut, Swiss gold referendum on same 7-day period

Putting all together, the CRB is on its way to post the fifth consecutive monthly decline, a pattern not seen since the commodities crash of autumn 2008-winter 2008. The chart becomes especially ominous when we factor in China’s slowing growth.

The fact that China’s first rate cut in 2 ½ year, OPEC’s decision to cut supplies and Switzerland’s referendum to raise gold reserves are occurring all on the same week does reflect a sign of panic by accumulators of commodities.

Oil & gold decisions

If the Swiss public votes for this weekend’s referendum forcing the Swiss National Bank to double its gold, the central bank will have to buy about 10% of annual production over the next five years. The inevitable resulting erosion to the SNB’s currency reserves would hamper its ability of managing policy and combatting disinflation. With Swiss CPI remaining at 0.0% y/y and the franc’s 5% appreciation against the euro, disinflation could come back and bite creditors.

Regardless of what OPEC decides at this week’s summit and the SNB reacts to this weekend’s referendum, the path of least resistance remains down for gold and oil. And each time gold rose 40% relative to oil (as it has at present), equities have lost at least 15%. We stick with our forecast for the equities top to emerge in mid-December, followed by another ugly Q1.

CRB Gold China Nov 25 Chart

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