Gold & Oil Plunge, The Next Asset Bubble, Ben Bernanke’s Crib, and More!

by Addison Wiggin & Ian Mathias

  • Gold prices dive… the AF team tells you why and what to expect next
  • Greenspan’s cuts created a housing bubble — our bet on where Bernanke’s cheap money will flow
  • Frank Holmes on a $1.5 trillion growth story
  • Has the market found a bottom? Dan Denning’s signal for when the crisis will end
  • Gas prices back down… is there a price that will make consumers stop driving altogether?


Wow. Gold investors took profits overnight with abandon. Spot gold dropped $100, to $910 — a level last seen in mid-February and the biggest downward 24-hour move for gold in 28 years.

“After a great run for gold in the first 10 weeks of 2008,” writes Byron King, “large funds are taking profits to round out their first quarter. Some are liquidating to meet margin calls. When gold passed $1,000 and moved up toward $1,030, there was a serious drop in physical demand, particularly from the jewelry users. Demand from India just plain fell off a cliff.”

“There were also rumors circulating yesterday,” adds gold aficionado Ed Bugos, “the futures exchanges were going to raise margin requirements on some commodities, but no one knew which ones.

“Then the Chinese central bank increased its reserve requirement ratio for banks by 0.5%, to 15.5%. This might have had some effect on the commodities markets. Chinese demand is a big driver for most of them.

“But let’s get real,” Ed concludes. “The Fed is pumping a lot of money into the financial system, it has dropped interest rates by more than half in eight months and it’s using Depression-era loopholes — all in an effort to heap mounds of liquidity on the mortgage crisis. Inflation can only continue to spread. The crowd that is bullish on gold for the right reasons is a relatively small crowd, but the Fed is proving them right at every turn.

“The current slide in gold should be enough to shake off these short-term negatives and give bulls another window of opportunity to accumulate gold positions for a second run at $1,000. I think we’ve seen the worst of it on this go-around.”

For more on Ed’s favorite stocks for the next leg of a gold rally, click here.

But gold was only the most visible commodity to get sold in earnest yesterday. Oil retreated by its greatest margin in over 17 years yesterday, too.

The oil market greeted a positive supply report by dropping five bucks in the New York session alone, closing in the U.S. at $104.

Not only did supply increase 200,000 barrels, but the U.S. government also announced it’d be adding 700,000 barrels to the Strategic Petroleum Reserve. Traders in Asia kept the spirit alive and sold the black goo down to $99 a barrel.

The last time oil fell by more than $5 in one day was Jan. 17, 1991 — the day the U.S. started the Gulf War.

Wheat prices in Chicago trading dropped the maximum daily loss the Chicago Board of Trade will allow. Futures for May delivery dropped 90 cents, to $10.74 a bushel.

That’s 20% off its all-time high of $13.49 from late February.

In addition to wheat, oil and gold… you can add every other commodity under the sun. The commodities correction we’ve been expecting happened in a very short span of time. The CRB Index, which tracks 19 tradable commodities, dropped 5.7%, from 405 to 382.

“I will not be surprised that two-three years from now,” Kemal Dervis of the United Nations Development Program suggested yesterday, “we realize that the liquidity and macro boost generated to fight the subprime housing crisis ended up fueling a commodity bubble.”

In fact, a full-year look at the CRB looks a little heavy:

“Each time, financial markets overshoot and macroeconomic policies are forced to react to the ensuing bust by encouraging, unwittingly, another bubble somewhere else. It may well be the commodities that are now rising in price at an unreasonable and unsustainable rate.

“We may again, then, be faced with fighting the negative consequences of an unforeseen downward adjustment.”

“It’s plausible a commodity bubble could be next,” comments our Chris Mayer. “We’re not there yet, but if this plays out, commodities could really go parabolic, and investors stand to make a ridiculous amount of money as we ride to that peak.”

“The key, of course, will be to know when to get out. But I think we’ve got some time yet.”

On the other hand, insatiable demand from China and India are placing real upward demands on the market for commodities.

“China and India have come out with these five-year plans,” our friend Frank Holmes reminds us. “When you combine them together, it’s almost $1.5 trillion to spend on infrastructure over the next five years. In 1970, basically, ‘Chindia’ had no global footprint. Today, they are 40% of the world’s population, growing at 10%.

“During this period, we have not been finding enough commodities to meet the fact that the world’s population went from 3 billion to 6.5 billion people. In fact, the whole population of the world in 1970 now lives in city centers. The commodity pricing does not impact their budget as much as it has impact here, because our salaries are so much higher. These are very important global shifts.”

Mr. Holmes is a crowd favorite at our Vancouver event every summer. We’re taking reservations for A View From the Peak: Seeking Profits in a Time of Risk and Scarcity as we speak. Discounts are still available. But if you’re planning to attend, you should reserve your spot soon… they are filling up fast.

Given all the drama in the commodities pits, you might be surprised at how aggressively the stock market sold off. The Dow, S&P 500 and Nasdaq handed back the majority of Tuesday’s record-setting gains with losses of 2.5% and more. Energy and commodity stocks got hit the hardest.

“I remind you that the current crisis is both a liquidity and a solvency crisis,” writes Dan Denning. “Whole swaths of mortgage-backed securities are still out there and still carrying AAA credit ratings.

“The Fed’s willingness to make money available or to accept mortgage-backed collateral may loosen up credit markets. But it won’t and can’t improve asset quality. The solvency issue — the concern that banks may still be sitting on losses that could wipe out their capital and shareholder equity — won’t go away anytime soon.

“This crisis isn’t going to go away until losses on mortgage-backed securities are fully realized.”

Today could be a doozie for stocks, as well. But for other reasons than direct asset quality. A rare “triple witching” Thursday will throw fuel on an already fiery market. March stock index futures, stock index options and stock options all expire today.

Chances are good you’ll see traders go for a ride as they scramble to exit their positions.

In an equal and opposite reaction, the dollar has been steadily rallying since the Fed’s rate cut on Tuesday. The dollar index rose a point and a half, to 72.8, this morning.

The euro shed two full cents versus the dollar, to $1.54 as we write. The pound and loonie fared the same, down to $1.98 and 97 cents, respectively. The yen returned to 99.

On the consumer front, gas prices failed to reach another record high yesterday for the first time this week. AAA says the national average price at the pump is now $3.27.

Nearly three out of every four Americans polled by CNN say recent gas price increases “have caused financial hardship for them or their households.”

Unleaded prices are up about 28% since this time last year. The latest Commerce Department report showed gas station sales were down 1% in February, despite higher gas prices. If gasoline hits an average of $8 a gallon, says the poll, “most Americans said they would quit driving altogether.”

Heh… we’ll see about that.

The Conference Board’s measure of leading economic indicators furthered its longest losing streak in seven years today. The group’s index assembles economic data like jobless claims, building permits, vendor sales and market performance and bunches them into one score that’s meant to predict the overall business cycle.

The Conference Board’s latest leading indicators measure fell 0.3%, to 135. That’s the fifth straight month of decline, its worst losing streak since the tech bust.

We end today with a spot of poetic irony. Even Ben Bernanke is losing money on his home. According to a Bloomberg report published today, the value of the Fed chairman’s home in Washington has fallen around $260,000 from its $1.1 million peak in 2006.

He paid a humble $840,000 for a Capitol District row home back in 2004 when he moved to town for job-related reasons. Like a good chunk of Americans, he’d be lucky to break even on his home today.


Addison Wiggin
The 5 Min. Forecast


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