commodity report: 05/31/11

Market Nuggets: Barclays: Chinese Power Price Hikes Supportive For Aluminum

(Kitco News) -- Aluminum is being supported by news that by china will raise electricity prices for non-residential users for the first time since November 2009, say analysts with Barclays Capital. China is facing power shortages this summer due to squeezed power-plant margins, low water levels and strong domestic demand. Barclays says the shortages should affect Aluminum the most among the base metals, which is also ture for power price increases, given the power intensity of Aluminum smelting. Nickel pig iron producers are also likely to suffer as this is a comparatively power-intensive process. out of the nine provinces that have Aluminum-smelting producation, seven have some capacity that purchases power from the grid and therefore will see their costs rise, and at least 28% of chinese Aluminum production that will be affected by the increase in power tariffs, Barclays says."This increase in power prices will put further upward pressure on the production costs of an industry and a country where marginal production costs are already at a record high," Barclays says. Additionally, tightness in power availability will affect the South African aluminum industry, Barclays says.

James Grant and James Turk discuss gold, the Fed and the fiscal situation of the USA

James Grant of Grant’s Interest Rate Observer (http://www.grantspub.com/) and James Turk of the GoldMoney Foundation discuss the history and mission of the Fed, how mission creep has taken it wildly beyond its initial purpose into the territory of QE, ZIRP and other fiat currency experiments.

They talk about who benefit from zero interest rates and how savers are penalized by this easy money policy. They explain that the US have been off the gold standard since 1913, Bretton Woods being only a shadow of the classical gold standard. In the last 40 years low interest rates have encouraged leverage and speculation, which have reached incredible levels.

They discuss the fiscal profligacy of the US government. A solution to debt levels could still be found if the political will existed. US strengths and positive momentum could still be harnessed to save the dollar if people’s eyes could be opened. However they conclude that every paper currency in history has eventually gone to zero.

James and Jim also talk about ZIRP and the absence of the bond vigilantes after over 30 years of bull market in bonds. How traders no longer care about fundamentals, like balance sheets, but rather focus on very short time horizons and the spreads between funding costs and yields. How this situation is unsustainable.

They see gold still as a very under-owned, misunderstood and marginal asset still shunned by institutional investors, with a few notable exceptions which indicate that the tide could be turning. They see a gold standard in the future, although timing is always uncertain.

At the end they talk about the history of US post civil war specie resumption and parallels to a return to the gold standard in the future. Private alternatives and competing currencies are a possibility; if politicians are too slow to provide solutions the market could do it for them.

Fatal Mistake: Self Will Run Riot

Emotions, good or bad, are of little benefit to the commodities trader. Overexuberance at a good trade and feeling suicidal when a loss occurs serve no purpose. Wins happen and losses happen, and a trader needs to stay level-headed and focused, or be consumed by the market frenzy.
The phrase “married to a position” is used when someone has a losing position and won’t let it go, no matter what. Take my advice— get a divorce. When you see a position isn’t working out as you expected, get out of it. Being married to a position means you’re not being rational and looking at the trade objectively; you’re letting your emotions get in the way. Don’t do it. Go back to the reasons you initiated the trade in the first place. If the situation has changed, the best advice may be to change the position, too.