Simply ore-some

I hope you are paying attention, because this rise we're seeing in the markets Down Under is a once-in-a-generation spectacle. It's hold-your-breath time as "investors" daily pick up the high jump pole and easily clear the record high bar left over from the day before. Just great sport.

Let me show you what I mean. This is a chart of the SPI (the Oz equivalent of the US S&P500 futures contract) shifted back in time and overlayed on the Nasdaq chart as it blew the tops off back in 2000, which was also a generational extravaganza.

(Click on chart to enlarge; this is not body part spam)

Guambat has many times before wrung his hands over the dot.commodity boom, and expressed his gobsmackedness about this unstoppable leviathan. You'd think they'd come up with a receipe for sweet and sour copper the way the Chinese are consuming metals (or at least we are told they are). At this point I can only recommend flowing with the gold, laying back and thinking of BHP, Rio Tinto, Freeport McMoran, because trying to make any rational sense of this will only drive you mad. If you're going to be delirious, I say, be deliriously happy.

There are many people remarking on this levitating thing of wonder and beauty. It is childlike joy and abandon to see bubbles floating, balloons disappearing into the blue sky. One broker says, with an astrologer's wisdom, "So, the stars are aligning for the sharemarket at the moment, particularly with higher metal prices and oil prices overnight which helped push some stunning performances from BHP and Rio Tinto."

Others are more prosaic. Stephen Wyatt writes in the AFR,

Investor exuberance continues to push global resource markets to extraordinary levels. Gold prices hit 25-year highs yesterday and silver 23-year highs, while world oil markets rallied to record levels and copper hit its highest level ever.

Copper has more than tripled in the past three years to break through $US6000 a tonne, zinc has quadrupled through $US3000 a tonne, spot alumina prices have rallied fivefold through $US600 a tonne and gold has doubled through $US600 an ounce. In response, Australian resource stocks have leapt - BHP Billiton rallied to a record high above $30a share yesterday.

Gold in Asia yesterday was trading at $US617 an ounce and silver at $US13.67 an ounce.

Oil hit a series of new price peaks yesterday in all global markets except crude oil futures for May delivery traded on the New York Mercantile Exchange. Still, that was trading at $US70.77 a barrel in Asia late yesterday, just US8¢ away from its record of $US70.85 a barrel. Brent, the OPEC basket, the Mexican basket and Asian crudes were all trading at record levels.

And the market does not see the oil price falling anytime soon. Crude oil for delivery in 2013 was priced near $US70 a barrel.

Few analysts are prepared to call a top to these markets. The momentum is just too strong.

The chairman of precious metals consultancy group GFMS, Philip Klapwijk, warned that in the gold market "you're playing with fire if you ignore the weight of money argument looking ahead into 2006". "In the right circumstances, the 1980 high of $US850/oz could even be taken out," he added.

But some are warning that the markets are becoming increasingly dangerous as more and more speculative money floods into commodities. There is a rising disconnection between fundamentals and price.

GFMS recently pointed out that high gold prices were undermining the fabrication demand for gold. This accounts for almost 80per cent of total demand. Gold fabrication demand fell 18per cent year-on-year during the fourth quarter of last year and this weakness appears to have continued into 2006, with GFMS noting the possibility of it falling by 20 to 30per cent this year if the price uptrend continues. The gold market is now actually in supply surplus.

GFMS concluded that gold above $US600 an ounce was not sustainable long term, and that a $US400-500 ounce price range was sustainable.

And gold remains dangerously overbought. While the fundamentals for other commodities are much stronger, analysts are still asking whether these commodity markets have now rallied too far, too fast as well. Billions of dollars of speculative money is now flowing into commodity markets from investment funds.

Citigroup commodity analyst Alan Heap estimated that hedge funds (including commodity trading advisers) now had $US80billion invested in commodities.

There is a rising fear that commodity markets are on the edge of a downward technical correction. Few analysts, however, expect the boom to end any time soon. Most suspect a correction in a continuing bull market.

However if the world is confronting its fourth oil shock, it must be remembered that the three major spikes in real oil price in the past 30 years - the Yom Kippur War, the Iran-Iraq War and the Gulf War - all pushed the US economy into recession.

I keep hearing about the weight of money as the main cause of the rise of the Oz bourse. This argument doesn't put much weight on the demand for the physical metal or the shares of the companies producing it, but on the fact that there is just so much money being built up in superannuation and pension accounts and it has no place to go. What this means is that we are all saving as best we can for that rainy day but all of our savings are being funneled into the same few honey pots, which only (1) makes a motza for the money managers and (2) dilutes the value of the honey.

And while I find the weight of money argument compelling at a gut level, I still can't figure out if there is too much or too little liquidity in the system, which would seem to this thick observer to be necessary to support the argument.

I think that one factor that does make the weight of money argument look more potent than it is would be the proliferation of hedge funds. Apart from the instability this creates at a systemic level, this has exaggerated the peaks and valleys of the roller-coaster that is the market movement. Until these guys came along, most fund managers were pretty well limited to being long-only. That is, they could only make money on a rising market, and try to outperform the rest of the losers in a falling market.

Hedge funds, though, can go short, that is, actually profit and make money from a falling market. And, all the new "derivative" financial "products" (which are really nothing more exotic than gussy-upped bets) such as ETFs and minis and warrants, just make it so much easier for them and their bookies, oops, brokers. So, what I think we are seeing is the effects of these guys using their incredible financial muscle to push markets up until they just won't go any more, and then push them back down until they won't go any lower. They don't need to ask about fundamentals. It is an irrelevant consideration to try to assess if whatever it is they are pushing at the moment (these guys are absolute sluts and will do any market, anywhere) is overvalued or undervalued. They ride the dance pole of momentum and survive on averages and quick entry and exit. And most of them aren't even guys; they're black boxes.

Of course, there are some guys playing the games, too. Yesterday, the Oz market had one of its biggest point gain days on biggest volume in yonks. In trying to find reason for that (silly me), I discovered that CNBC's head spruiker, Jim Cramer, had, the day before, pounded the table for "investors" to "pillage the earth". (See this blog and this blog.) Now, I don't want to be taken for any petulant petunia, but I would hope that the "investors" in some of those companies have a good idea of what it is they are investing in. (See this post, and this one, and this one as examples of some of the tangential matters Guambat has explored).

And if you don't happen to be a hedge fundy, you might want to consider some little bits of reality as you race along your giddy way to ever greater heights, as Corrinne Lim and Stephen Wyatt reported in the AFR earlier this week:

The relentless advance in the prices of commodities - particularly industrial metals and gold - has been enlivened by an improved outlook for world growth in recent months and a rush of new money from investment funds.

The International Monetary Fund is expected to raise its global growth forecast this week to 4.8 per cent for 2006, up from a forecast of 4.3 per cent last September. If the growth rate is achieved, it will be the first time since the early 1970s that the global economy has expanded at a rate of more than 4 per cent for four consecutive years. [Of course, there was that nasty little bear market in the mid-'70's].

Commodity analysts with the Macquarie Bank group have just made significant upward revisions to their copper, zinc and thermal coal forecasts for 2006, 2007 and 2008.

The main driver of the copper upgrades was the continuing disruption to supply. The refined zinc market is expected to remain in deficit by about 400,000 tonnes in 2006 - enough to run inventories down to record low levels.

Yet these upward revisions still put the markets at levels lower than they are now. Copper, for example, is forecast to average $US5587 a tonne this year, $US5208 a tonne in 2007 and $US4409 a tonne in 2008. Cash copper is now trading at $US6242 a tonne.

Similarly, zinc is forecast to average $US2712 this year and $US2866 next. It is now trading at $US3078 a tonne.

The thermal coal market is expected to hold its level of about $US51 a tonne over the year but slide to $US45 in 2007, then $US40 in 2008.

"Our central expectation remains that this potential conflict [Iran] will be avoided, but the risks add to the near- to medium-term path of oil prices. The economic implications are stagflationary."

Stagflation occurs when sluggish economic growth is coupled with a high rate of inflation. In recent years, the global economy and corporations have weathered the jump in the cost of energy, transport and other raw materials. Inflation in most developed nations has so far remained benign.