The budget deal in D.C. could end up crushing gold—here's why.» Read More
It's been one of the worst investments of 2013—and this Roubini strategist thinks it will get even worse.
Gold, copper and grain prices have dropped precipitously this year. In fact, JPMorgan's commodity team recently used that as a reason to get bullish on the space. "In a number of commodities, prices have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand," JPMorgan's note read.
In fact, JPMorgan said that "Sentiment is universally bearish," creating some real opportunities.
But Gary Clark says that sentiment is bearish for a reason. On Tuesday's "Futures Now," the commodities macro strategist at Roubini Global Economics listed the three catalysts that will continue to drive commodity prices lower.
Reason One: Declining Chinese Demand
Chinese expansion has been a huge factor that has undergirded the long run up in commodity prices. But now, "we're seeing weakening in demand growth across the board there," Clark said.
As Clark predicts in a recent note, "China's slowdown will accelerate next year, driven by a collapse in the metal-intensive, investment-driven portion of growth. Demand for metals will fall much more sharply than headline GDP growth numbers would suggest, from double-digit to low single-digit growth and possibly to zero" in the case of iron ore.
And just how important is Chinese demand? "To offset a 1 percent decline in Chinese copper or aluminum demand would require a 3 to 5 percent boost in U.S. or European demand or a 15 to 20 percent boost in Indian or Brazilian demand," Clark writes, adding: "all of which are highly unlikely."
Call it a crude awakening. Geopolitical risk, a large inventory draw, and anxiety about going home short over a holiday weekend have set up oil for higher prices.
Crude oil futures have seen a tremendous move higher this week, as the momentum that carried oil from last week's bottom on the worries of China's cash crunch has been accompanied by this week's tensions in Egypt. In addition, oil is entering the peak of demand season this week. And on Tuesday, inventory data from the American Petroleum Institute showed a tremendous draw. All in all, traders have been given every reason to buy this market.
(Read More: Oil Rises on US Oil Stock Decline, Egypt)
After the API data, crude was able to test a high as $102.18 on Tuesday night. The market has already begun correcting back below $101. Wednesday's Energy Information Administration data will be released as regularly scheduled, and will be one of the most closely watched inventory numbers in recent weeks.
Support will now be found at $99.98 to $100, and a close below here will show signs of a failure. To maintain this pace of momentum, bulls want to see a retest of $102 on Wednesday, and a close above $101.20.
As the situation in Egypt escalates, crude oil prices have approached the $100 mark. There is always a significant risk premium built into the price of crude based on the tumultuous political nature of the Middle East. Egypt is not a huge oil producer, but it is important to the oil market because of its proximity to key shipping lanes.
(Read More: US presses Egypt president Morsi to make political concessions)
In reality, the massive protests against Egyptian President Mohamed Morsi we are currently seeing probably won't end up resulting in any supply disruption—or at least, any disruption that offsets the decent supply levels of global crude.
The issue, however, is that the market has been reminded that there is headline risk, and that short oil positions can cause anxiety. This is particularly true considering that the market will be closed for the Fourth of July holiday.
Gold is enjoying a corrective bounce—but investors shouldn't get too excited yet.
Bullion showed signs of life in the second half of the session on Friday, and recovered from its lows to trade above resistance and close at $1,223.70.
On Monday, gold reached a high of $1,247.40, and is trading at roughly $1,240. We believe this to be short covering into the end of the month and the end of the quarter, as investors lock in profits from this bear market.
(Read More: Three Reasons Gold Will Go to $800: RBC Strategist)
They're two of the assets investors have loved the most for quite awhile—and this year, they've been two of the most disappointing.
Apple and gold are both down more than 25 percent in the first half, with the latter performing the worst. But Mark Dow of the Behavioral Macro blog said the two could follow very different trajectories in the second half.
"Apple is in the later stages of a bubble," Dow told "Futures Now." "Gold, on the other hand, is in the acceleration phase of an unwinding bubble."
That means that the two will trade differently.
Apple, he said, "is trading on the idiosyncratic factors of Apple: 'Have they come out with something new? Are they going to?' "
Gold, however, was pumped up because of a macro thesis that was simply incorrect, according to Dow.
"People were fundamentally wrong about the consequences of printing money, and they're just coming around to this realization now," he said. "It's not just the recent Fed actions. Gold has been going down for two years. It's just now that it's starting to accelerate that it's really catching people's attention. So gold, in my view, has much, much further to go."
If history repeats itself, we could see another 11 percent of downside in gold.
The metal stretched itself to new lows early in the Thursday night session, reaching $1,179.40. However, we are starting to hit oversold conditions: Four out of the five major technical indicators that we follow are showing oversold.
Gold has recovered somewhat in early Friday trading, reaching a high of $1,211.40 before consolidating back below $1,200.
(Read More: Three Reasons Gold Will Go to $800: RBC Strategist)
When you're right, you're right, and Edward Lashinski of RBC Capital Markets was right on when he predicted that gold would go to $1,225. The yellow metal hit his bearish year-end price target in Wednesday trading. So where does the director of global strategy and execution for RBC's Futures Group see gold going next?
"I believe that most of the headwinds that were present remain, so I believe ultimately we could go to $800 to $900 an ounce," he said on Thursday's "Futures Now."
He then went on to outline the three reasons that gold could lose another third of its price.
The incredible rise of Japanese stocks, and the gut-wrenching correction that recently ensued, have only one parallel for Peter Schiff: The dot-com bubble of the late 1990s and 2000.
In both rallies, investors shifted away from accepted means of valuation, and were instead "deluded by fairy tales," Schiff said. As tech stocks skyrocketed, "We were told that valuations, revenue and profits no longer mattered."
And as Japan embarked upon a policy of massive quantitative easing, "monetary policy was seen as a substitute for an actual economy."
(Read More: PM Abe Says G-8 Welcomed Japan's Economic Policies)
Now the Japanese Nikkei index sits nearly 20 percentage points below its late-May peak. But Peter Schiff, the CEO of Euro Pacific Capital, said it could get much worse.
"The Japanese government could quickly become insolvent," Schiff said. This would happen if Japanese bond yields continued to rise, for "if rates on the 10-year debt were to ever match the 2 percent of their inflation target, more than half of total tax revenue would be needed to service debt payments."
But Miller Tabak's chief economic strategist, Andrew Wilkinson, does not believe that Schiff's concern is a serious one. "My opinion is that it probably won't happen," Wilkinson said regarding Schiff's nightmare scenario.
"The nature of the Japanese bond market is that the majority of investors are domestic. So I don't see foreign investors throwing in the towel as being a big-picture driver here."
Beyond the intricacies of the Japanese bond market, Schiff and Wilkinson have a fundamental disagreement about economic policy.
Silver dropped 4 percent on Wednesday, adding further losses onto an unbelievably tough year for silver. While gold has fallen over 25 percent, silver has lost nearly 40 percent of its value.
Traders blame the fact that the inflation investors expected the Federal Reserve to create has simply not materialized. Now, with the Fed talking openly about tapering, a major reason to own these metals has been lost.
"There should be a bounce from here, but micro, macro, and momentum are still to the downside," Jeff Kilburg of KKM Financial wrote to CNBC.com. "The Fed has seen some decent data this week to support a tapering campaign earlier rather than later."
Rich Ilczyszyn believes that silver has more room to drop. "Hindsight is 20-20, but if you look back to when silver was $50, that was clearly a bubble," he said.
But like any good trader, he would get in at the right price.
"I'm looking to get long at $16 or so," Ilczyszyn said.
Gold is poised to break below $1,200 on Wednesday. As we previously predicted on CNBC's "Futures Now" blog, gold stayed in check until options expiration, but after Friday's expiration, the metal resumed its selloff.
(Read More: Gold Prices Sink to Lowest Level Since August 2010)
On Monday evening, gold put in new lows, reaching below $1,250. And on Wednesday morning, we now see it just above our $1,221 support target, with a $1223.20 low. This is a fast market, and we have already seeing a bounce off of the lows—but we anticipate this to be short-lived. Our major downside target has always been and still remains $1,154.
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