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Global Commodity Bubble - Look At China

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The situation in commodity markets is very relevant to housing with regards to its impact on inflation, economic health, consumption and interest rates.

So the rise in commodity prices, and arguments over whether they are due to speculation, supply-demand imbalances, asset class shifts by pension funds or peak oil and the likes are quite interesting.

Here is an article on Bloomberg that seems to give a very simple clue as to where the commoity bubble is coming from: China. But rather than increased demand, those markets seem to have been turned into good old run of the mill speculative bubbles originating in China.

A few things must be noted about China: China is a nation of gamblers investors. Vast amounts of money have been and are still going to China. The stock market over there has crashed by about 50% over the last 8 months and the property market is shaky at best, with funds leaving them at high speed.

One question that was nagging at me was: where is all that money going?

The article below points to the answer I think. It sounds surprisingly much like the dot com bubble. If accurate, the commodities markets are much more vulnerable than they seemed.

Article Link

http://www.cnbc.com/id/25699008/for/cnbc/

Some choice cuts:

Driven by a boom that is expected to see China's economy grow by at least 9 percent this year, commodities trading grew 142 percent to 35 trillion yuan ($5.1 trillion) in the first half of 2008, compared with the same period last year, according to the China Futures Association.
Its main stock index has fallen 50 percent since October, hurting ordinary investors and making a growing number willing to embrace higher-risk alternatives in an economy with few investment options.
According to investors, Huaxia customers used Web-based accounts to trade commodities, with the company charging a percentage on each deal. Chinese markets trade futures in wheat, soybeans, palm oil, sugar, cotton, corn, gold, copper and zinc.
Ye Xinying [...] joined [Huaxia , commodity brokerage] as a broker in March during an expansion that she said created a nationwide network of sales representatives.
Edited by williamdb

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I haven't read the piece, but what you say above is correct, and is something we were talking about a month or two ago. One muiist remember that the global liquidity glut has not gone awya, but in the meantime nearly an entire asset class has disappeared. So we have theat surplus money going somewhere else. It is not rational, but there you go...

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If you look at the long term graphs for zinc, lead and nickle they are remarkably similar. The spike was caused by demand outstripping supply as new mines took time to come on stream and speculators piled in. Zinc has now dropped to a level where some mines are closing as they are no longer economic. There was forecast to be a surplus of zinc this year and next before going into deficit again. Once this occurs the price will again rise. Yes there is speculation but the price is also demand driven.

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A global credit crunch and downturn in Western trade should eventually quell their appetites.

If a s/exc buring isn't enough of a thrill for these first time capitalists then any commodity shock should make em learn quickly enough.

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I read somewhere that whilst at Goldman Sachs Paulson visited China on no less than 70 occasions.

Does anybody know to what extent Goldman, JP Morgan etc are involved either directly or indirectly with the Chinese markets?

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I haven't read the piece, but what you say above is correct, and is something we were talking about a month or two ago. One muiist remember that the global liquidity glut has not gone awya, but in the meantime nearly an entire asset class has disappeared. So we have theat surplus money going somewhere else. It is not rational, but there you go...

A distinction was usually made between funds going into commodity (from western pensions, 'speculators', etc.) and funds going to China (assumedly for investment).

I think what is a surprise (at least to me) is that China may be acting as a conduit for funds to go straight back into the commodities markets.

If the small Chinese punters have gone into this en masse, it would explain the highly speculative behaviour of the markets. The US may well be barking up the wrong tree blaming western speculators, ICE etc.

Edited by williamdb

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Yes there is speculation but the price is also demand driven.

There can be no speculative bubble without a good 'story' to support it.

The supply-demand argument is very good IMO but the question that is so hard to answer is whether we are in a speculative bubble or not. If yes then commodities could trade at less than half their current prices within a few months (assuming we are near the top of course).

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If you look at the long term graphs for zinc, lead and nickle they are remarkably similar. The spike was caused by demand outstripping supply as new mines took time to come on stream and speculators piled in. Zinc has now dropped to a level where some mines are closing as they are no longer economic. There was forecast to be a surplus of zinc this year and next before going into deficit again. Once this occurs the price will again rise. Yes there is speculation but the price is also demand driven.

Totally agree, if it was speculation why and 5 trillion moved into all commodities then why then are their huge dicrepancies in the prices of all commodities. And also why have the commodities went up 1000% since 2000 that are not traded on an exchange?

Again, it is a complete lack of understanding from what "price mechanism" actaully is. Also just because 5trillion enters a market, someone has to take the other side of a trade. Fior every buyer there is a seller. You could have 5 trillion of new money coming into a market, and the market could fall by 50%. It doesn't mean prices will rise. Like Rettah said the reason prices are rising are due to supply and demand, and also the monetary policy of Bernanke, by lowering interest rates to 2%. The US is exporting inflation, meaning other countries have to print their own currecny to buy the USD, which is causing inflation...so this rise in commodities is down to four reasons...

1) Suppy decreasing

2)Incremental demand increase

3)MOnetary policy of central banks,money printing,excessive dollar liquidity

4)A cyclical upturn in commodities

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If yes then commodities could trade at less than half their current prices within a few months

As indeed zinc, lead and nickle are. AIMR today suspended it's zinc mine saying it was now uneconomic.

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There can be no speculative bubble without a good 'story' to support it.

The supply-demand argument is very good IMO but the question that is so hard to answer is whether we are in a speculative bubble or not. If yes then commodities could trade at less than half their current prices within a few months (assuming we are near the top of course).

What bubble in commodities?

Sugar is 80% below its all time highs

Cocoa is 60% below its all time highs

Gold in real terms is well below its all time highs

Silver is 60% below its all time highs

Wheat is 50% below its all time highs

Copper is no higher than it was in 2006

Cotton is 15% below its all time highs

Palladium is 60% below its all time highs

Pork bellies are well below their all time highs( cant think of the numbers of the top of my head)

Orange Juice is 40% below its all time highs

And we have higher corn, oil,platinum,soybean oil,hogs, in nominal terms but in inflation adjusted these are below their all time highs, apart from OIL...

I find all this talk of a commodity bubble very confusing...I thought bubbles occured when markets made new highs, not when they were 30%-80% below all time highs. I would say it is a money printing bubble, not a commodity bubble

These are all nominal, inflation adjusted then they would be even cheaper in real terms...

I m sure there will be a correction soon in the prices at some point. Doesnt mean its a bubble. What are you measuing it in? USD, CAD, EURO, YUAN...GOLD? They are cost more expensive in USD, the reason being the USD has lost purchasing power against every currecny,commodity in the world, apart from the Zimbabwee dollar...

We will have corrections...For the last 7 years the media and financial analysts were calling bubbles in oil. Remember oil has had one 50% and two 40% corrections since 2000. Everyone shouted the end of the bubble, then it shot up to new highs. The media are a great contrarian indicator. Yet they dont seem to know the price of the commodities they claim to be in a bubble...maybe if they looked at the facts they would see the fallacys in their emotionally laden journalism. However, many have already made huge corrections...

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The US is exporting inflation, meaning other countries have to print their own currecny to buy the USD, which is causing inflation...so this rise in commodities is down to four reasons...

3)MOnetary policy of central banks,money printing,excessive dollar liquidity

Putting the supply-demand and speculation arguments aside. The point about the dollar and inflation is curious in one respect.

I am personally looking for inflation hedges and can see the point about commodities preserving their value and therefore being a good inflation hedge.

But two things undermines this concept for most commodities: lack of return and storage costs. It just doesn't seem practical/economical (if at all possible in some instances) to store say led, or corn on a long term basis. This particular argument may be flawed for all commodities but for precious metals that have relatively low storage costs.

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Guest DissipatedYouthIsValuable

I suggest we let the Chinese lose all their money gambling/investing and get back to selling them opium once the depression sets in.

Before you know it, we'll have Hong Kong back.

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Putting the supply-demand and speculation arguments aside. The point about the dollar and inflation is curious in one respect.

I am personally looking for inflation hedges and can see the point about commodities preserving their value and therefore being a good inflation hedge.

But two things undermines this concept for most commodities: lack of return and storage costs. It just doesn't seem practical/economical (if at all possible in some instances) to store say led, or corn on a long term basis. This particular argument may be flawed for all commodities but for precious metals that have relatively low storage costs.

Hey William, you can buy a fund, or a future,or an ETF...? Does this mean you are speculating? No, it means you are protecting your money, as it is the very things you willeat in your life. The other thing is, about a week before the contract ends, the non-commercials,ie the traders will sell their contracts to the people who will actually take delivery of the product and use it. So you do not have to take delivery of the oil. Just get expsoure through an option, CFDs (ABN Amro have a good acoount for this)and ETF if you dont want the leverage. The futures market plays a very important role in channeling investment towards where it is needed, and helps to prevent very sudden price shocks,as new information can be discounted at the time...

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What bubble in commodities apart from OIL...?

China's 10.1% expansion added to oils woes and triggered another sell off. Can we swap growth rates? Inflation adjusting, oils previous high was $106 in 1979. There is resistance above $145 with consumers curtailing fuel activity - America car users bulk at $4.85 per gallon of diesel [15% higher than unleaded]. Sounds like a wet dream, 53 pence per litre.

I m sure there will be a correction soon in the prices at some point. Doesnt mean its a bubble. What are you measuing it in? USD, CAD, EURO, YUAN...GOLD? They are cost more expensive in USD, the reason being the USD has lost purchasing power against every currecny,commodity in the world, apart from the Zimbabwee dollar...

True to a point but in relative terms stripping aside the $'s demise, the price of oil has increased nearly 25% yoy since Nov 2004

£1 = $1.60 Nov 04 and $2.00 July 08

€1 = $1.10 Nov 04 and $1.60 July 08

Oil priced at $50pb Nov 2004 and $132pb July 08

€45/£31.25 per barrell Nov 2004

€82/£66.00 per barrell Jul 2008

Since 2004 has there been a major supply blockage in the system getting oil to market...? My radar is saying "Bubble Alert"

Edited by md23040

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China's 10.1% expansion added to oils woes and triggered another sell off. Can we swap growth rates? Inflation adjusting, oils previous high was $106 in 1979. There is resistance above $145 with consumers curtailing fuel activity - America car users bulk at $4.85 per gallon of diesel [15% higher than unleaded]. Sounds like a wet dream, 53 pence per litre.

True to a point but in relative terms stripping aside the $'s demise, the price of oil has increased nearly 25% yoy since Nov 2004

£1 = $1.60 Nov 04 and $2.00 July 08

€1 = $1.10 Nov 04 and $1.60 July 08

Oil priced at $50pb Nov 2004 and $132pb July 08

€45/£31.25 per barrell Nov 2004

€82/£66.00 per barrell Jul 2008

Since 2004 has there been a major supply blockage in the system getting oil to market...? My radar is saying "Bubble Alert"

Your logic is right as far as it goes. However, you are assuming that the Euro and Sterling,ie,the ECB and BOE have not been creating vast amounts of money also. However, all fiat money has been losing purchasing power against hard assets,commodities...

I have heard the arguement that it can't be dollar related because oil has went up in price in all currencies. The dollar trade weighted index has'nt went down as much as oil has went up..so therefore it is not USD related...

This arguement doesn't make sense, and it is one of the reasons the FED and CNBC point out to the sheeple,a la carte...However, what they dont seem to realise is that the dollar trade index is measured against a basket of currencies. Currencies that have been creating vast amounts of money also..

The ECB and the BOE haven't been printing money at the same rate as the dollar hence they have went up against the USD, but they have been creating more money relative to the supply of commodities such as oil and gold. Hence we have seen all money losing its value...

By your thinking MD23040 then when oil went up 100% from 10 USD to 20 USD that should have been a bubble. When oil went from 20 to 40 that should have been a bubble, from 40 to 80, everyone was calling a bubble, and now from from 70 to 147, that is a bubble. Oil has had one 50% and two 40% corrections in the last 8 years.

The economist have been consistentely wrong and the geologists have been right. Oil will correct maybe 40-50% and people will say for the 100th time, I told you oil was in a bubble. However, it will go to 300 plus USD in the future.

The people who have been calling a bubble in oil have lost alot of money....as they keep searching for a top, same as the experts on Bloombery and Bank CEO saying the worst is over for 9 months, and bank stocks have bottomed.

Anyone who says oil is bubble, once it corrects then they should put their money where their mouth is an keep shorting oil...

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Commodities aren't in a bubble IMHO, they're just adjusting back to where they should be after two decades of underinvestment in raw material production, agriculture and mining.

Oil has gone down a bit this week, but it's likely to be an insignificant pullback in its long bull market.

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Commodities aren't in a bubble IMHO, they're just adjusting back to where they should be after two decades of underinvestment in raw material production, agriculture and mining.

Oil has gone down a bit this week, but it's likely to be an insignificant pullback in its long bull market.

For sure, between 1982-1999/2000 commodities went down. Margins were squeezed and there was under investment. Incremental increases in demand from China/India, Asean, with falling supply, and the USD inflation is the icing on the cake...

Edited by VedantaTrader

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Sounds like a wet dream, 53 pence per litre.

Problem is, the average US driver does 50% more miles and 33% worse fuel economy, so thry are paying out as much as if drivers were paying 120p/litre.

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