Commodity Complex heading for a Losing Year

During the outburst of "Liquidfidous" ( a response induced by overexposure to Central Bank created liquidity), the commodity complex had experienced back to back years of outstanding gains. The years I am referring to of course are 2009 and 2010. Alas, since the watering hole has dried up, the drain has apparently opened beneath the commodity complex as a whole resulting in a losing year for this particular asset class.

It is currently down about 11.3% from its closing levels of 2010 as speculative money flowed out of the complex when traders became convinced that another round of QE was not forthcoming right away. April marked the high water mark for this sector as traders anticipated the end of the QE2 program on time a mere two months later. From that point, the complex has been unable to mount any impressive rallies and has been in a slow grind lower.

You can see on the following chart however that the move lower has brought the index into the 38.2% Fibonacci retracement level from the low made in 2008, from which it did manage to bounce higher although the move has thus far not been very impressive. It is an understatement at this point to say that the hot money crowd is more concerned with slowing global growth and the backwash from the European Sovereign Debt issues and downgrades than it is with any inflationary outbreak. In such an environment, cash becomes king and that is why we are seeing the Dollar rally and Treasuries holding near record highs.

If the complex can attract enough interest however at the start of the New Year, and manage to claw its way back abovce the 600 level, there is a chance we have seen the worst for commodity prices overall. This would benefit the silver market which has fallen down to major support at 26 in today's trade.

If however we see a continuation of this deflationary mindset when trading commences next week and the index falls below the recent low, it could be a rough ride for the next few months in this complex as there really is no substantial chart support until we reach the 50% retracement level down near 507 - 500. If prices were to somehow breach that level and fail to quickly recover, the economy would be in serious, serious trouble.

Central Bankers are no doubt monitoring all of this and have certainly been discussing potential actions should things go from bad to worse. They probably feel that they now have more room to act seeing that prices of both food and energy have fallen well off their previous peak levels thereby eliminating the inflation fears that accompanied the first rounds of liquidity injections.

Next year should certainly prove to be very intersting indeed.