After rising this year from a very low level, commodity prices in general and metals prices in particular have paused and even dropped back a little over the summer as Chinese buying came to an end and the world seemed to draw breath after such a strong rebound. The bulls would have us believe this is a necessary consolidation before the next rise but MetalMiner has not been so confident we are going to see any dramatic moves up from current levels and consistently called for caution this last month or so. Even a weakening dollar has failed to re-ignite the rally in copper in the absence of any significant buying interest from China and after the heavy re-stocking we saw in the first half of the year.
However a report in Reuters details Goldman Sachs latest change of emphasis regarding commodities in the third quarter. The most successful bank on Wall Street has cut its exposure to commodities reflecting a belief that the rally in prices has, for now, run its course and we can expect to see a dip back in prices in the fourth quarter. The change is reflected in two ways, first, a reduction of 32% in their VaR (value at risk the sum of money a bank is willing to lose in one day of trades) to $27 million and a reduction in hirings for the commodity department. Of course their change of approach does not preclude them from coming back into the market next year but it supports our own position this last two months that further price increases are unlikely and the forth quarter could see a drop back in prices as demand fails to materialize as hoped. Even as Goldman have scaled back, the article observes that Chinese electricity demand has picked up strongly from July after remaining depressed for much of the first half suggesting the heavy imports of physical metal between January and May was a mixture of SRB purchases and speculative position taking. The speculative stocks are now in the process of being consumed but a failure of the SHFE exchange premium over the LME to reappear suggests plenty of material is still available locally in China. Other Wall Street banks like Citigroup and JP Morgan Chase have continued to hire in the commodities sector suggesting they see continued strong growth but it takes a brave soul to bet against Goldman’s track record in reading the markets, love Ëœem or hate Ëœem their past success speaks for itself.