Commodity Prices

My take on what’s happening. Because Europe is now in complete meltdown mode, the world is panicking.

    • Greece will have no choice but to soon pull out of the euro.
    • Spain, already reeling, will fall next. It can’t possibly fund the nearly $1 trillion of debt it has coming due in the next 12 months, yet alone bail out its failing banking system.
    • Italy will soon start to totter. The contagion will definitely hit the country, one of the most indebted in all of Europe.

And all of this is happening right here and now, made all that much worse because Europe’s economy is now sliding deeper into a recession … while the U.S. economy is also now rolling over to the downside.

So with all this panic, why are commodity prices swinging so wildly? Why aren’t they just skyrocketing, acting as the inflation and government collapse hedges that they are so well known for?

It’s rather simple.

First, the initial stages of any panic usually lead to massive asset liquidation, no matter what the asset, and a flight of capital into cash (including U.S. bonds, which are a form of cash). So that causes massive downdrafts.

Second, right now the European Central Bank (ECB) appears to be taking a tough stance, refraining from money printing. Print they will, but not until their back is up against the wall. Probably when a big bank or financial institution fails in Europe.

Third, it will take more than just the ECB to stem the panic. If the ECB prints on its own, it’s merely going to give the signal that things in Europe are worse than they appear.

Put another way, it’s going to take coordinated central bank actions around the globe to stem the panic. But even here, I don’t believe that’s going to happen till both Europe and the United States’ backs are both against the wall.

That’s going to happen. And ultimately it’s going to send commodities and tangible assets through the roof again.

But in the meantime, wild swings and large downdrafts are going to become commonplace.