Many Sold In May & Ran Away

There is not much in the way of cheer coming from the commodities’ space in general, at this juncture. The S&P GSCI Spot Index of 24 raw materials posted its largest monthly decline since the economic contraction of 2008 last month. The 1.1% drop in the Index seen yesterday rounded out the 13% loss that the sector suffered in May. Among other notable declines, copper lost 12% on the month.

The development prompted similar statements to the ones we cited above for gold; “Certainly we are seeing a risk-off mentality,” said Natalie Robertson, a commodities analyst at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “More pressure may be coming from Europe and the other negative factor is the dollar/euro, which is going to weigh on commodity prices.”

The slump is being attributed to the May flight of speculators from the niche in the wake of the dollar’s spectacular vault. However, a good portion of that robust ascent by the greenback is attributable to the emergent situation in Europe, China, and now, in India as well. Greece, Spain, Italy, China, and India continue to weigh heavily on the minds of those who expected yet another year of stellar performance in commodities. The Fed’s reluctance to buckle to market pressure and pull yet another QE from its top-hat has also frustrated commodities’ players so heavily addicted to “free money” from Mr. Bernanke and his team.

The “ChIndia will save the world with their insatiable appetites” (for commodities) bull camp has been dealt yet another factual blow this week with the recording of certain economic metrics from India. China has already become a larger-than-large question mark for the markets this year as experts ponder that country’s ability to avoid a hard landing in coming quarters. But now we have India to add to the “to worry about” (if you are dabbling in commodities) list. To wit:

“India is an Asian powerhouse that is rapidly running out of steam” warns the Wall Street Journal. “Gross domestic product growth of 5.3% in the first quarter was the slowest rate in nine years. But India's problems don't end there. Inflation is at 7% and the rupee is Asia's worst performing currency this year.” It turns out that, unlike China, whose problems are the result of a combination of internal blunders and bubbles and the effect that the EU’s crisis could have on its exports, India’s woes are fully “home-grown.”

The Journal notes that “while other emerging economies might look to blame their woes on the crisis in Europe, India's problems are largely of its own making. The central bank has held rates high for the past two years to help keep a lid on rising prices. The policy has had little positive effect--India's prices are driven by supply constraints in food and energy, not demand.”

Speaking of demand – as in the US variety of same – here is an interesting summary-cum-myth-busting on a quite familiar topic, courtesy of Index Universe and its interview with Bill Bernstein. The conventional thinking among gold bugs who overloaded on bullion in the wake of the Fed’s QE programs was that hyperinflation was going to be the natural, inevitable outcome. Not so fast, says Mr. Bernstein. Time for a brief Q&A session:

Bernstein: “Helicopter Ben has flooded the world with money, and we haven’t had inflation. Isn’t that amazing? Both he and his Princeton colleague Paul Krugman predicted that, and they were both right.

IU: And what is it that has made Bernanke right?

Bernstein: PQ = MV: price x quantity = money supply x the velocity of money. So you can double the money supply as long as the velocity has been cut in half, which is approximately what happened.

IU: Which is telling us what – that the financial sector is still wounded, and it’s not really moving that money around?

Bernstein: Well, that’s one way of looking at it, but I’m more convinced by the opposite case, which is that the reason rates are so low is simply because business demand is so low. It’s not so much what the Fed is doing, although the Fed is doing its part. But it’s more important that businesses aren’t demanding capital.”

When it comes to the Fed, the upcoming June 20 meeting of the FOMC is seen as perhaps the last nonpolitically-tinted opportunity to either do something that smacks of a QE of some type, or to simply leave current policies in place and let things play out in the economy at large the way they have been. One possible item under consideration is an extension of the OT (Operation Twist) program which is set to expire on the 30th of the month.

For the time being, an outright QE by virtue of which the Fed expands its balance sheet and creates reserves is in doubt. Fed Governors Plosser, Lockhart, and Williams have all said “No, thanks” to the idea while Mr. Lockhart has also…locked out the need for extending OT. At any rate, and also for the time being, you may confidently dismiss hard money newsletter assertions that the EU crisis will motivate the US Fed to cave in an offer up another dose of QE.

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