Apparently, even the 7-year commodity boom is not immune to the laws of supply and demand…
According to the World Gold Council, total demand for gold dropped 19% in the second quarter from a year ago to 735.6 tonnes. Jewelry demand was particularly sensitive to higher gold prices, with the greatest declines coming from India (down 47% to 118 tonnes) and the U.S. (down 30% to 33 tonnes).
According to the Department of Transportation, Americans drove 12.2 billion fewer miles in June 2008 than in June 2007, a decline of 4.7%. “Since last November, Americans have driven 53.2 billion miles less than they did over the same period a year earlier – topping the 1970s’ total decline of 49.3 billion miles.”
Finally, in a bearish article on gold, silver and commodities on LewRockwell.com, Gary North states the obvious: commodity demand does not fare well in consumer-led recessions.
If we are talking economic fundamentals, gold and silver have had their big run. From now on and for months ahead, the pressure will be downward. Why is this the case? Because the recession is real. If the rest of the world moves into recession, as I think is likely, the demand for commodities will fall. The value of commodities has nothing to do with value in themselves. They are valuable only because the consumer goods that commodities are used to produce are expected to rise in price.
The Bearing Fund has traditionally held a significant long position in gold and gold mining equities, as well as a small long position in commodities. As of July 31, the fund held its smallest position ever in gold (6.15%) and gold stocks (11.35%), and its largest short position ever in commodities (15.31%) which is comprised of crude oil, grains, and copper. We have, however, been slowly adding to our holdings in physical gold and gold shares on recent weakness.
Two weeks ago, Investor’s Business Daily ran on op-ed titled “The Ship Turns” which made the case that dramatically higher crude oil prices are changing the supply/demand equation.
According to data from a variety of sources, world oil output has jumped by 11%, or 8.5 million barrels a day, since 2002, to 83 million barrels a day.
Contrary to the predictions of petro-paranoids, private oil companies are producing flat out — even though government entities such as the Organization of Petroleum Exporting Countries and the U.S. Congress work to keep prices high.
Fueled by the high prices, new sources of oil are being discovered. They include the 33-billion-barrel bonanza recently found off Brazil’s coast and other huge finds in the Caribbean and Asia. The U.S. itself has 656 trillion cubic feet of natural gas and 112 billion barrels of oil on federal lands alone — there for the taking if only Congress would allow it.
But even without it, we’re going gangbusters. As the American Petroleum Institute recently noted, “an estimated 4,577 (U.S.) oil wells were completed in the first quarter of 2008, up 12%” from last year and the highest rate since 1986. U.S. oil companies are going back to tapped-out wells and pumping oil that wasn’t economically recoverable at $25 a barrel but is at $100.
U.S. fuel demand in the first three months of 2008 was down 1.4% from a year earlier — the third straight quarterly year-over-year decline in a row.
Gasoline consumption has risen about 1.5% a year since 2000. But Energy Department data showed demand in the first quarter edging down for the first time in more than two decades.
In short, the tide has turned.
The New York Times notes that U.S. car buyers have suddenly gone ga-ga over small cars. One in five purchases is now a compact or subcompact, while SUV sales are off 28%. “It’s easily the most dramatic segment shift I have witnessed in the market in my 31 years here,” said George Pipas, Ford Motor’s chief sales analyst.
Meanwhile, Market Vane‘s Bullish Consensus is 86% on crude, showing extreme optimism. T. Boone Pickens was interviewed on CNBC this morning and expects $150/bbl oil. And now crude oil for 2016 delivery is higher than spot prices, a rare event and sure sign of speculation. This contango situation in the futures markets is all the more notable considering the onset of peak driving season is days away. The spot contract is saying there is plenty of oil available at these prices, perhaps a sign that demand destruction has, in fact, occurred.