Printer Friendly

eMail Article

February 09, 2009

The Great Relevering
by Daniel Aaronson and Lee Markowitz

One of the biggest problems for long positions in gold and commodities generally in 2008 was the leverage used by investors in the futures market. Of course, as prices increased so did the profits and the equity of these investors. The additional equity was levered further by buying even more futures contracts. This was a recipe for disaster as delevering took full force.

Furthermore, in 2008 the other common trade was to be short long-term treasuries. The decline in commodities that wiped out so much equity forced a massive short squeeze in treasuries reinforcing both trends. That was 2008.

In 2009, commodities have now stabilized and some have even risen. Long-term treasuries are falling once again. Both of these trends, combined with all of the cash on the sidelines, are laying the groundwork for what lies ahead.

The Federal Reserve is fighting deflation aggressively in an attempt to create inflation - when it wins the battle it will make the aftereffects of the 2003 battle with deflation look like child's play. In 2004-2006, leverage was used to speculate in housing. In 2009 and for the foreseeable future, leverage will be used to build futures positions in all types of commodities. As profits begin to accumulate, greater and greater amounts of leverage will be used in the futures market. After all, animal spirits never die and speculating with cheap capital is what central banks are enticing investors to do. This "Great Relevering" will be even more powerful than the delevering that took place in 2008.

Since financial assets were the old leadership, it is clear that real assets will be the new leadership making this opportunity overwhelmingly favorable. Inflation-adjusted commodity prices are near all time historic lows as cash waits on the sidelines searching for a home. The buying of levered commodity positions sounds like home sweet home.

Daniel Aaronson
Lee Markowitz CFA
Continental Capital Advisors, LLC

Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.

Copright 2009 © Continental Capital Advisors, LLC

Image rendition and html coding Copyright © 2000-2009 SafeHaven.com

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »