Commodities Shift, Gustav Effect, Negative Savings Rate and Casey Research!

In turbulent markets as these, even seasoned pros second-guess their own judgements. The amount of pressure one is under from external forces and binding agreements can force even the brightest analysts and fund managers to make grave errors.

In the last 2 days we have witnessed a dramatic drop in stock prices across the junior mineral sector marked by Toronto Stock Exchange's 500+ point plummet so far, taking the TSX Venture down along with it.

On Tuesday a largely successful commodities fund announced they are closing the fund, last valued at August 2008 at $2.8 billion dollars, on unexpected performance losses of more than 40% year to date. Many suspected the liquidation of such large volume responsible for the further firesale of commodities the last few days, and days to come. Earlier this year it was valued at close to $9 billion dollars. What makes it worse, was Lehman Brothers owned 20% of the fund as well - making it a guarantee to drag the FI sector lower with it.

The closure of a stricken hedge fund part-owned by Lehman Brothers has thrown the spotlight back on to a potential sale of the bank's investment management arm.

Ospraie Management, of which Lehman's holds a 20pc stake, will close its commodity-focused Ospraie Fund after it lost 26.7pc of its value in August alone, bringing its total loss to 38.6pc for the year-to-date.

The Ospraie Fund, in which Credit Suisse also owned an undisclosed stake, suffered as a result of making heavy one-way bets on energy, mining and other resource investments, investments which tumbled last month as a result of what Ospraie founder Dwight Anderson called a "substantial sell-off" across the commodity complex.

The fund, which was worth $2.8bn (£1.57bn) at the start of August, was one of four run by the firm, which will be left managing $4bn of assets after Ospraie's closure, down from $9bn in March.

Popular Finance Pages such as Yahoo! Finance has resorted to commenting stock prices as a direct reverse correlation to the daily oil gas fluctuations and putting commodities all in one basket.

The drop in oil prices weighed heavily on commodities across the board.

Natural gas futures fell 68.2 cents, or 8.5 percent, to settle at $7.261 a gallon, their lowest closing price since late December.

On Friday, crude prices settled at $115.46 a barrel as Gustav approached the Gulf Coast region, home to a quarter of US. crude production and 40 percent of refining capacity. But traders grew less jittery when Gustav weakened as it neared the offshore oil rigs and Louisiana refineries.

The remnants of Gustav's trails were not nearly as bad as people thought, bringing down oil prices (supply-demand ... when supply's not in danger anymore, all of a sudden a still shortgage of commodities eases...for the time being!)

Speaking of messy frontline news, Associated Press today reported that Stocks Plunge further after unexpected job loss and retail sales data.

Wall Street tumbled Thursday on more disappointing economic news _ retailers posted sluggish back-to-school sales reports and the government said the number of workers seeking unemployment benefits spiked last week. The Dow Jones industrials fell more than 200 points.

Investors, already highly anxious about the overall state of the economy, were further unsettled when many of the nation's retailers said shoppers curtailed spending last month due to higher gas and food prices. Wal-Mart Stores Inc., the world's largest retailer, beat Wall Street projections because of its discounts.

As if the previous news of higher than usual consumer confidence and satisfactory unemployment data from the last 2 weeks did not matter? It should be on the basis of constantly-swaying popular press such as this headline that a value investor should seek shelter for his or her own nestegg.

I had been fortunately lately and met up with an analyst at Doug Casey, who confirms the bleak performances of late for even the legendary newsletter writer's own internal seed capital fund. Keep in mind, this is the man that thousands flock to for advice for investment decisions. One thing he wanted to make sure people keep in mind though, was today's situation is very similar to the 1970's, when he was still a struggling insurance broker / investment advisor..

Few of them at Casey seem to think a recession similar to 1974 and 1980 will occur. Similarities include:

- Slowing economies
- Falling equity prices (includes homes)
- Rising commodities prices (food, oil, metals)
- In some cases, worse - higher than ever government debt (Fannie / Freddie bailout and more corporate bail outs to come)

With inflation adjusted cost of gold now at an oversold state, many predict within a year the bull run will swing back into full speed. After all, the liquidated capital has to go somewhere, all the world's mattresses will likely not fit all that cash, right?

On another point - the savings rate in US is now at negative, as inflation rise ($100 can buy less than 95% of what it could last year), while overnight lending rate by Federal Reserve Board is predicted to be lowered to 2%.

2%.

In real world terms, $100 saved will now net you $102 in a year, before applicable income taxes on gains. Unfortunately, things are getting more expensive by 5%+ a year, and this is based on a very optimistic CPI released by the official bodies.

What is the point of hoarding fiat currency when its worth less than what it is yesterday, or the day before? As Casey group points out, once the public is concerned with commodities (and not just their daily encountered ones such as rice, potato, oil, gas, etc) and starts realizing copper and gold is far more worthwhile than the latest dollar bill, commodities will see the next boom.

During the first seven months of 2008, the CPI-U rose at a 6.2 percent seasonally adjusted annualized rate (SAAR). This compares with a 4.1 percent increase for the 12 months ending December 2007.

The energy index rose at a 33.1 percent SAAR in the first seven months of 2008 after increasing 17.4 percent in 2007. Gasoline prices increased at a 35.2 percent SAAR in 2008 after a 29.6 percent increase in 2007, while natural gas prices rose at a 71.3 percent SAAR after decreasing 0.4 percent in 2007. The food index has increased at a 7.6 SAAR for the first seven months of 2008 after increasing 4.9 percent in 2007. Excluding food and energy, the CPI-U has advanced at a 2.5 percent SAAR following a 2.4 percent increase in 2007.

http://www.bls.gov/cpi/cpid0807.pdf



Looking to the left for Gold prices from 1970's from the official source we see that gold prices isn't really that high especially when inflation adjustments have been factored in.

Given we are only producing 1% additional per year of the world's gold supplies, and demand is only going up with more emerging economies like China and India, the majors like Kinross, Yamana, Barrick, and Gold Corp will need to start replacing their depleting resources soon - led by the likes of Aurelian Resources's takeover by Kinross, due to complete its course in the next few days, despite raging protests from many retail shareholders who found a new voice through technology and internet.