Commodity Markets Updated

It appears that I was a little early in my bearish call on commodities. However, with the exception of oil and a few select commodities, most are still below their Feb/March highs. I covered most of my shorts at small losses in late March when it looked as if the Socgen and Bear Stearns lows would hold. I played gold pretty well thus far as I took profits on some big down days.

I still think that commodities (excluding gold) are headed lower this year and the TSX with it. The TSX is actually a big up day away from its all-time highs! (With the exception of HGD (an ultrashort gold ETF), I have no positions here but may take some in the future).

Bubbles can persist for a long time, and perhaps I am way too early on this one.

What will be the catalyst?

One thing that can hurt commodities in the short run is a strong US dollar. The US dollar has become universally despised. If it can put a short/intermediate term bottom here versus the Euro and rally to 1.50-1.52, it could put a top in oil, gold and other commodities, especially given the leverage and profits inherent in these positions. The Fed meeting next week looks like a 25 pt cut, and this could be the spark that the USD needs.

What are some of the clues that perhaps this commodity rally is not for real?

1) The Canadian dollar topped in November at 1.10. It is currently near par. It has not confirmed the 2008 commodity rally (bearish divergence). If commodity prices were to continue strong, shouldn't the Canadian dollar be stronger? Perhaps the loonie has been weak due to the aggressive rate cuts or perhaps it was simply too speculative a move back in November.

2) Record oil prices have only recently allowed oil stocks to hit new highs. Perhaps this is due to general stock market weakness or perhaps the stocks are leading the underlying commodity... The same is true in certain other areas (such as gold). I believe that the crude oil market is not a free market with a level playing field as it trades so strangely. However, if we get a true breakdown (as we did in Sept 2006) to sub $100, this would likely bring the rest of the commodities down as well. I don't buy the BRIC argument and I think that oil at these levels can not be explained by demand pressures.

Since it also looks as if the financial rally is ending, the 75% of the TSX in 3 groups (mining, oils and financials) could be vulnerable here. I don't think most Canadians realize how risky the TSX is right here.

I'm also looking for the BoC to cut 50 tommorrow.