Bruce Whitfield:
Our market commentator, Peter Brooke is Equity Strategist at Old Mutual Asset Management in our Cape Town studio this evening and you have been doing some work recently Peter on the commodity market; in other words, taking a look at the metals, taking a look at the minerals and you have come up with some very interesting observations.

Peter Brooke:
That is right Bruce, every week we get the speculative positions from the Chicago’s Futures exchange and I just go through those every Monday and what we have been seen recently, is that the net long positions have been coming down.

In other words, in English, the investors out there had gone and bought metals or commodities, oil, copper etc., through the Futures market and recently they have started selling those, and this has coincided with those commodity prices coming off.

So for instance, the oil price is down from $77 down to $65 a barrel, a 16 percent drop, we have seen the precious metals are down and more recently, the base metals have come off quite sharply, zinc, nickel are down ten and nine percent in the last week alone, and obviously, that is having quite a big impact in our market.

Month to day resources is down seven percent, while the financial and industrial index is up one. So you can see how the selling has started to come through and one of the stockbrokers just quantified it, and they estimate is being about $12-billion worth of outflows in the last month. Primarily in oil, there have been $5-billion of outflows and about $5-billion of outflows in gold.

Bruce Whitfield:
But certainly huge selling in these markets. Are these prices coming down for fundamental reasons? Are these just traders who are trying to make a margin? Is it that simple?

Peter Brooke:
I think the fundamentals are obviously the main driver, but what happens is, these speculators add momentum or power to the movement, so as commodities started doing well, through the fundamental demand from China and elsewhere and the lack of supply, traders and speculators jumped on that bandwagon and bought them up.

And there has been about $100-billion worth of net flows into pure commodities. And that obviously absorbs more of the supply and pushes the price up. Now, if we see a reverse of that trend, it will add pressure on the downside and I think that just highlights the growing risk in commodities as they get to higher and higher prices, we start to see the potential for speculators to exit out or to take profits.

Bruce Whitfield:
And that is when the rollercoaster ride becomes much more vigorous and much more unpredictable?

Peter Brooke:
That is exactly right. I don’t think we can say this gives a clear message for the commodity price going forward, but what it does say is we are likely to see more volatility.

Bruce Whitfield:
But you look at the gold sector last week for example, the gold index on the JSE was down ten percent in a single week, and that is the sort of stuff that did not quite have people throwing themselves out of 31st floor buildings, but it does sort of make them a lot greyer overnight.

Peter Brooke:
Yes it does, and I think that is why you need to have a balanced portfolio. You need to have maybe a little bit of gold, but you also want to have offshore assets, you want to have bonds, property, cash etc because if you are just sitting on a gold fund, it is too wild a ride.

Bruce Whitfield:
The highs are high and the lows are even lower. Peter Brooke thank you very much indeed for that analysis of the commodity sector. He is Equity Strategist at Old Mutual Asset Management.