Thursday, May 11, 2006

 

Going Parabolic

Commodity markets trade differently than financial markets. This is due to the fact that the supply of commodities is restrained by natures ability to produce. Markets like gold, silver, soybeans, and corn all have a limited supply. The production of metals tends to be very predictable. A new mine might open but it doesn't greatly impact world supply and there will not likely be a great increase in the supply of metals until some clever scientist makes the dreams of alchemists into reality.

Gold and silver have gone parabolic like commodities are wont to do. The chart of both markets looks like the right side of a parabola and that is very interesting because another characteristic of commodity markets is that they tend to put in spike highs and lows. Financial markets like stocks and bonds tend to have rolling tops and bottoms. In a bull market, a financial market will see its momentum slow, the stock market at tops will be lead by fewer and fewer issues, and the initial down phase will be a slow, meandering. Commodities fly into their highs and fall off just as quickly, at least when a major top is being put in place. We are witnessing gold and silver and many other metals flying higher so it is an open question about what's next.

It has long been my belief that easy credit was behind the great bull markets in stocks and bonds and that real estate, commodities, and metals are the new arenas for the perpetuation of the great asset bubble of our time. Today we see oil, gold, silver, real estate, and most stock markets near their highest prices, which is rather remarkable, and I am wondering when the contraction of credit will begin. If I am right, these markets should fall in unison, also.

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