People today have been reading too much of what George Soros calls as the "prevailing bias".
By prevailing bias we mean a self-reinforcing trend which tends to not only to influence market psychology through prices but also through “fundamentals”.
The prevailing bias is that the present "deleveraging phenomenon" has been lowering collateral values and in effect destroying “demand”. This feedback loop feeds into the thought process of having the decreased demand (in the real economy) resulting to even lower prices and further liquidation. So the vicious downside spiral. But where does it all end?
Basic economic laws tell us that the prices are determined by demand and supply curves, such that when the cost of producing commodities has fallen below the production cost, mounting losses will incentivize a curb in present production and suspend future projects as well, which equates to constricting overall supplies. So economic laws tell us that the present downtrend becomes a race to the bottom between supply or demand. The winner determines the price trend of the markets.
As discussed earlier in More Compelling Evidence For An Inflection Point in Commodities!, there had been increasing evidence of “supply destruction” in base metals and agriculture to the point where concerns have even shifted to HUNGER.
Let us give an example: take a look at copper
LME Warehouse Copper stocks have risen today to 1st quarter 2007 levels when copper prices fell to only at around the $2,500 per lb levels then. Now prices are significantly below $2,000 per lb.
Yet copper production remains in a deficit from Jan-July by 54,000 tons (Reuters).
Nevertheless, the economic report from International Copper Group Study Group remains ambiguous,
``According to ICSG projections, a modest surplus of about 100,000 t is anticipated for 2008. The calculated deficit for the first half of 2008 of about 125,000 t is expected to be overshadowed by a 235,000 t surplus in the second half owing to seasonally weaker second-half consumption and a downturn in global markets. Although supply continues to be constrained, usage in the three leading consuming regions continues to weaken [China, the European Union-15 countries (EU-15), and the United States]. Preliminary projections for 2009 indicate a surplus of around 275,000 t (1.5% of usage). Note that in calculating global usage, China’s copper usage is based on its apparent consumption using reported data (production + net trade +/- SHFE stock changes) and does not take into account changes in unreported stocks [State Reserve Bureau (SRB), producer, consumer, and merchant], which may be significant during periods of stocking or de-stocking. However, newly-released data on Chinese copper stocks for 2007 has been incorporated into 2007 apparent consumption calculations, resulting in a downward revision to Chinese apparent usage and an upward revision to the ICSG world market balance for 2007, which now shows a surplus of around 295,000 t.
``ICSG recognizes that the current crisis in the financial and credit sectors may significantly alter current forecasts. Not only may global usage be reduced by a global economic downturn, but also credit constraints and altered feasibility analyses could reduce or delay expected new production. Therefore, we are cautionary as to the uncertain net impact of production and usage constraints on forward-looking market balances….
So ICSG is apparently caught in a dilemma between falling demand and falling supplies.
The market dissonance goes the same in the gold markets.
We understand that physical gold markets covering bullion and coins have rapidly been disappearing as buyers have seemingly scrambled to scoop up any available physical gold. Here are some articles:
Dubai runs out of gold on Diwali rush (October 29th)
Bloomberg-Zurich Bank's Vault Is `Full to the Top' With Gold (October 15th)
Bloomberg-Perth Mint Doubles Gold Output on Haven Buying (October 1)
Business Standard India Post rakes in Rs 2.6 cr from gold coin sales (October 31)
Evening Standard UK- Gold runs out in German rush (October 10th)
Timesonline.uk -Vietnamese seek the security of gold (October 27th)
Or take a look at this commentary from Mark O'Byrne published at the fxstreet.com (highlight mine)
``Physical demand remains near record levels internationally with rising premiums for all bullion products and delays and shortages deepening. There are now little or no gold coins or bars (1 oz and 10 oz) available for immediate delivery throughout the world. There are no silver coins or bars available besides 1000 oz silver bars.
``Investors are paying far higher premiums to secure physical bullion and they are willing to wait 6 to 8 weeks due to the unavailability of gold coins and bars and as they have no choice but to wait if they wish to take delivery of physical bullion.
``This demand is being seen throughout the entire world but especially in the western world, in the Middle East and throughout the Indian subcontinent and wider Asia.
``As noted yesterday, gold supply continues to fall with gold mining production worldwide failing 6% during the first-half of the year compared with the first half of 2007. Totaling just 590 tonnes between April and July, global gold mining output was the lowest since 1996 according to data from the US Geological Survey.
``The Wall Street Journal reported of "phenomenal" demand in India where in just 3 weeks Indian investors bought nearly as much tonnage of gold as they did in the entire final quarter last year. In the first 3 weeks of October alone, more than 50 tonnes of gold was sold. Incredibly, during the whole of October - December quarter last year just 80 tonnes was sold.
``The Journal reported that "gold sales have picked up phenomenally...following consistent steep fall in equity markets which has boosted the demand for the metal as a safe investment option.”
From Stockcharts.comSo why has paper gold not followed?
We can only guess but surely the glaring disparities in the physical and paper market seems fishy or anomalous.
Governments have nearly been “everywhere” in the financial markets. So global governments could be attempting to "short" or tamper or manipulate the gold market or the entire commodities markets to paint the image of suppressed inflation which gives them the liberty to "hit the accelerator to the floor".
Besides with global governments have been running the printing press like mad, inflationary policies ultimately will reveal themselves.
Unfortunately the markets are far greater than the collective strengths of governments, such that economic laws will ultimately prevail.
This means commodity prices are likely to go higher.
How the reflexivity theory might work?
And since the Reflexivity theory is a two-way feedback mechanism between cognitive and participating functions, where cognitive function runs from outcomes to expectations while participatory function runs from expectations to outcomes, the idea of economic laws determining prices is largely a participatory function from the present market conditions.
Since we expect fundamentals to eventually reassert itself, then commodity prices should hit bottom and begin to advance soon. Once the series of advances regain traction and following, the public will attribute stories of economic "recovery" to reinforce the convalescing trend. Thus, the feedback loop shifts from participatory to cognitive functions.
From here, the nascence of the upcoming "inflation" nightmare will also regain momentum.
Likewise rising commodity markets when supported by rising markets elsewhere will provide further reinforcement to such feedback loop.
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