In the last week we have seen the international media rage about skyrocketing prices of commodities and currencies. Most countries around the globe have old subsidy programs to cushion the volatility of commodities. As a result the prices at the supermarket don’t tend to reflect the extreme volatility on the various exchanges. Two examples are Coffee up 99.2% and Corn up 98.7% year over year from February 20th, 2010 to February 20th, 2011. The rationales for these dramatic rises in prices tend to vary from the weakness of the US Dollar, manipulation of High Frequency Traders HFT, and industry specific issues. It has grown more unpredictable over the recent past few years as the prevalence of politicized markets with Quantitative Easing and the speculation of computerized traders have become the de facto standard in the marketplace.
The actual consumers of the various underlying assets are finding it more economical to find alternative sources of commodities. In the Kingdom of Saudi Arabia the recent trend seems to be the acquisition of farm lands around the globe along with an ongoing effort to convert deserts into farm lands. The large importers such as Savola utilize sophisticated option strategies to hedge the costs of vegetable oil and sugar. It seems the whole world is trying their level best to stabilize prices of soft commodities.
The hard commodities have witnessed a spike in metals like silver, which is up 99.7% year over year. This is interesting because the consumption of silver for industrial use has not increased, which leaves us with either silver jewelry or silver speculators. On the other hand we have witnessed a 36.3% rise in copper, which is predominately used for industrial purposes. The rise of copper is a signal of continued growth in that sector of the economy. The other popular metal is of course gold, which has risen 24.1% year over year. Gold tends to be the favorite safe haven from a historical standpoint, which is evidenced in the elevated market price.
In terms of currencies we have seen a sudden spike in the Swiss Franc (CHF) recently. Despite recent articles about frozen Swiss banking accounts, it seems that everybody is running for the Alps. While we at The KIN Consortium view Switzerland as a facade, in terms of its neutrality or safety, it still seems that ultra rich investors have flocked to the Swiss bankers yet again. The recent spike in the CHF seems to be positively correlated with the recent uprisings in the North African Region.
The Australian Dollar (AUD) has also continued to rise to an all time high in the past five years. It has a strong yield and it tends to trade in a positively correlated manner with the Japanese Yen. It is actually quite interesting to see the Japanese Yen (JPY) has broken that correlation by trading down in the last few weeks against the AUD. The only rationalization that we could come up with is a combination of the attractive AUD interest rate, and the fact that Japanese manufacturers have been complaining about the strength of the JPY. According to our best forecasts, we at The KIN Consortium believe the demand for Japanese products will continue to rally the JPY currency unless we see a change in the locations of the various Japanese manufacturing plants, as alluded to in recent articles by Akio Toyoda of Toyota Manufacturing Company. Keep in mind Moody’s just down graded Japanese debt with concerns about the enormous debt burden. They are also anticipating a tax hike in Japan, which could potentially reduce the outstanding debt.
With a quick glance you can see the small cap Russell 2000 index is up 32.1%, followed by the NASDAQ 100 index up 31.3%. While the list of indices is not comprehensive by any means, it does allow us to see how the smaller capitalization (Higher risk) companies in America have benefited the most in our current economic climate. We tend to attribute this rally in this small caps to an over all technology rally, and the volatility of the Exchange Traded Funds (ETFs).
— Khalid I. Natto, [email protected], is chairman & CEO of The KIN Consortium.