Commodities plunges & speculation sickness

This week we have seen a quick sharp shocking fall of commodities prices including oil, gold, other precious metals, and agricultural commodities. Gold suffers the most painful downturn by dipping to $920 an oz or lower after hitting $1033. This is a drop of more than 10%!

Investing in commodities and indeed in many other assets including equities could be a risky business. I don't deny that; we have to accept such fact as life itself is full of risks. What I object to is sickening speculation! Gold is intended to be used as hedge against inflation and the unending devaluation of USD and if used sensibly, it can help a lot of us to ride through the present financial and credit crises. Unfortunately, stingy speculators come in to shoot up the price of Gold from $800 to $900, to $1000 and above within a short time when the fundamentals don't lend good support to such moves. I am not saying that gold should not hit over $1,000 but sensible investment should move gradually, sensibly and reasonably. Stingy and sickening speculations would bring chaos and disorders to the market, distorting all natural forces and movements, and inevitably create bubbles and cause disasters to all of us. This is what is happening to gold and other valuable commodities.

I wonder whether the sudden downturn of commodities prices would do any real good to speculators. If everyone is shorting or selling off commodities and related securities and investments, we are cashing in just like what we are and have been doing in the stock and currency markets. If such exercise will result in pumping more liquidity into other sectors including the financial and credit markets, then it may possibly be able to help Wall Street. But I doubt very much whether this may happen or has any real effect. When we cash in now, we are usually keeping the cash to wait for the bear to go away! We won't go back to the property or housing market, nor would we buy risky financials, debt products, the falling dollar. It won't help to boost any confidence. Why? Commodities hedge is perhaps our last resort in face of the unending decline of USD and if our last frontier is lost, so is confidence.

The next question is should we go back to currencies? Obviously, commodity currencies like CAD, AUD, ...are also sharping down with gold and oil. We can't get into these hedges. How about more Yen and Euro? Well, I have great reservations. Why? Japan can bear a strong Yen when commodities prices are on record high but when they are falling by 10% or more a week, the harmful effects of a strong Yen will outweigh other benefits. The same is applicable to Euro. Their central banks may intervene to devalue the currencies soon. That is why I think when gold and oil have lost their frontier, we will have no escape.

Would USD turnaround? May be for a short while. But this can't last long in view of the US slowdown, double deficits, the aging baby boomers, continued financial and credit turmoils in Wall Street, rapid increase of foreclosure, the Fed's generosity to Wall Street by cutting interest rate and pumping liquidity, etc.

How about the Chinese Yuan? I hope this is our last hope. But chances are falling down as well owing to the US slowdown. Nevertheless, RMB won't be able to devalue like other currencies. My wish is that the stingy speculators will be quarantined and isolated from shorting RMB. Theoretically they should not be able to do that but practically they may. Once we introduce derivatives or commodities related to RMB, stingy speculators will attack. That is why our Beijing Central Government is very wise to withhold or delay liberalizing the free convertibility of RMB and Chinese overseas investments. Don't do that or at least don't do that until the crazy market settles down.

So again the multi-million dollar question is what can we do now? Well, I am still not pessimistic but you must be defensive. Sell on rebound and if you could afford it, take a LEAP by buying financials and housing. They are the worst hit so far and both the Fed and Wall Street are trying to keep them alive. The Terminator's task is not to save humanity but only the leaders of their gang. So go after them and jump on their Ark before the flood destroys our world!