Goldman Sachs is now saying that it’s time for commodity investors to take some money off the table, as the price cycle for oil, gold, corn and copper is getting tired. I agree with this view if you’re a short-term investor. Everything is looking tired in this market and stocks and commodities are most certainly due for a correction.
As odd as this seems, the feeling I get from the current equity market action is that investors are basically satisfied. Share prices accelerated tremendously (after a period of weak sentiment) in anticipation of better earnings in the fourth quarter of 2010 and the first quarter this year. This expectation has mostly been met and the market is appropriately valued. In addition, the outlook for monetary policy is known and there’s stability in most mature economies. Therefore, investors need a new catalyst to get them to buy stocks. This catalyst has yet to present itself and that’s why we’ll likely get a period of lackluster trading action in stocks over the immediate term.
There has been a lot of bandwagon trading in the major commodities and open interest in futures contracts is high. Goldman figures that commodities should pull back in price over the next quarter or so, then reaccelerate as global demand stays relatively constant. The thesis being that speculators have slightly overdone the price action in the major commodities. I agree with this assessment, but would add that commodity price strength has proven to be so robust that the bears have been wrong time and time again. The price of oil should retreat, but I don’t think it will trade below $100.00 a barrel for any length of time.
So, in this market, with all the good news fulfilling expectations, the trading opportunities are reduced. If the spot price of gold pulls back (likely only because of near-term price strength in the U.S. dollar), then I would be considering new positions. The gold story in my view remains intact and nothing new needs to happen. Investing in gold has become the oil story of the past. As economies grow, particularly in Asia, the pressure will be on gold because of price inflation for goods and services, along with a U.S. dollar that’s in a long-term downward trend. But, like I’ve been saying for a while now, there really is no need for investors to rush into any big new positions at this time. A new catalyst is required for the next big trend.