Behind Today's Commodities Selloff (UPDATED)
The risk trade is definitely off Tuesday.
Volatility has exploded as traders take profits. Bears are firmly in control at the start of 2011, as some traders may see the market as having come too far, too fast. Gold has gained $100 in the last two months of 2010, silver surged 25% in the same time period, copper spiked nearly 20% and oil rallied $12 from the start of November to December 31.
So, traders say, the fact that commodities across the board are posting their biggest one-day plunge is eight weeks is completely warranted and not unexpected.
Some see a seasonal pattern.
"Oil prices have sold off at the beginning of the year and then rallied at the end of January or early February for the past three years," says veteran floor trader Ray Carbone, president of Paramount Options.
Others point to a technical correction.
Many commodities recently reached new highs — oil at its highest price in 27 months, copper at a fresh, nominal record — and that helped to set the stage for a wide range sell-off. Also at new highs: speculative long positions in many commodities, including oil. Large speculators entered 2011 with all time record net length in U.S. oil futures.
"They also had started 2010 with what was at the time record net length, but the net speculative positions at the start of 2011 are 67% higher than at the start of 2010," says energy analyst Olivier Jakob of Petromatrix.
Re-balancing broader commodity indexes also contributed to the sell-off.
"Rebalancing in the beginning of the new year caused some money to leave gold due to the high price," says precious metals analyst George Gero of RBC Capital Markets. "This selling by funds hit all very high record priced metals and some industrial commodities."
And then there's market sentiment.
This is often the biggest driver in a big price move. Equities rallied Monday, but commodities didn't really participate. New highs were reached in the session, but did not hold at the close. The pullback intensfied on Trading Day 2 of 2011 into a broad-based, sharp selloff. Declines may go even deeper in many commodities over the next few days, even for few weeks, some traders say.
But don't dismiss predictions that commodities will continue to stage a strong performance in 2011: Oil over $100. Gold at $1,500. Silver at $40. Traders aren't changing their long-term view, though they may be sellers in the short-run.
"It's very, very healthy. This is a healthy, cyclical reversal in the context of secular bull market," says John Netto, independent trader with M3 Capital.
Many still see the global growth story firmly in place and commodity prices rising in 2011.
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