Commodities were driving under the influence of debt again today.  The precious metals were hit hard with gold down about 3 percent and silver down about 6 ½ percent.  Equity markets also traded lower as Fitch flashed some warning on the U.S. banking sector, stating that the broad credit rating of these banks could decline if the European crisis is not resolved.  This should be no surprise, but the markets have been batting this ball back and forth for some time now.

Gold and silver seem to always fall victim to the "risk off" trade.  Investors get worried that the economy will come to a screeching halt and this will kill inflation expectations.  You can also attribute it to margin selling or investors simply selling their winners to take some money off the table.  Gold and silver have been the winners for many investors throughout the last several years.

Thursday was an interesting day as commodities were mostly lower, but a few of them appeared to turnaround.  Cocoa is a market that caught my eye.  After a brutal selloff the last week and a half, cocoa had a sharp reversal the last two weeks.  The rally came out of nowhere, as many of the other soft markets were lower and there was no solid fundamental reason for cocoa to rally.  Maybe somebody knows something or this is just typical trading in the soft markets.

Sugar continues to sink as supplies are building and the fundamentals have turned negative.  The market broke down technically and there is no short-term reason to have been long this market.  The grains are still holding a negative bias, as they are influenced by the overall negative environment.  The USDA recently gave the grain market a little better news but no rally was achieved.  This doesn't paint a good picture for the markets. 

Crude oil was able to break above $100 briefly.  However, the market reversed sharply on Thursday and closed at $99.24.  A solid close below 99 could open the door for a move back to 90-95. 

We typically see a rally going into the end of the year for the equity markets.  That also tends to support the commodity markets.  The markets surely have the feel like they won't rally into the end of the year.  However, we've been down this road before.  Things start to look ugly and the equity markets make a head fake lower.  Then we get a powerful rally.  Are we setting up for another replay? 

I have a negative short term view on commodities.  My long term view still looks very positive.  I almost want to see another leg lower on many commodities as they would approach a very nice value zone.  I still see some commodities as selling opportunities like crude oil.  Remember, we are approaching a slow time of the year for most markets as many traders take off for the holidays.  Markets can be prone to wide swings and cold temperatures can impact the energy and OJ late in the year. 

Chuck Kowalski
www.CommoditiesStreet.com