Commodities Watch: Pullback in Silver; Cotton Prices Continue Slide; Grains Also Lower (SLV, SIL, GLD, GDX, GDXJ, RL, GPS, LTD, LIZ, CORN, DBA)

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Today’s commodities news reflects on the sharp drop in silver, continuing softness in cotton prices, and another fall in grain prices. The fall in silver prices immediately following the announcement of the death of Osama bin Laden could lead to a conclusion of some kind of cause-and-effect relationship. That may have been the knee-jerk reaction, but by later in the day silver had recovered more than half its initial 12% drop.  It also requires the reminder that silver futures overseas were already lower before the Bin Laden news surfaced.

Still, it’s strange to see silver prices turn south. And whatever impact bin Laden’s death had on the price, it is far more likely that new margin requirements that went into effect last week have led to the sell-off. Last Monday, the Chicago Mercantile Exchange raised the margin for speculators by 9.2%, to $9,500 per contract (a contract is 5,000 ounces of silver).

On Sunday, May 1st, MF Global raised its margins on silver by 175%. That brings the margin increase for silver priced at $48/ounce, about $16,000/contract. As traders shed their contracts in silver, other commodities would also be affected as these traders seek more liquidity.

The iShares Silver Trust (NYSE: SLV) has lost nearly 4%, to $45.03, in a 52-week range of $16.73-$48.35. The Global X Silver Miners ETF (NYSE: SIL) is also down about 4%, at $27.28, in a 52-week range of $12.90-$31.34. Gold is also trading down, at below $1,550/ounce, and the SPDR Gold Trust (NYSE: GLD) is down about -0.4% to $151.89, in a 52-week range of $113.08-$153.61. The Market Vectors Gold Miners ETF (NYSE: GDX) is down about -1.5%, to $61.21, in a 52-week range of $45.88-$64.62. The Market Vectors Junior Gold Miners ETF has fallen somewhat more, -2.33%, to $40.68, in a 52-week range of $24.25-$44.86.

Cotton prices have been falling for several days straight now, and are down about -2.5% today, at around $1.5425/pound. Since March, cotton has lost 17%. The lower pricing appears to be the result of lower demand from China and a lower outlook going forward for China. Adding to the cotton’s troubles is the higher cost of cotton. Part of what seems to be happening follows from the old saying that the best cure for high prices is high prices.

Clothing makers like Polo Ralph Lauren Corp. (NYSE: RL), Gap, Inc. (NYSE: GPS), The Limited Inc. (NYSE: LTD), and Liz Claiborne, Inc. (NYSE: LIZ) are also down today. The largest drop is at Liz Claiborne, down almost -3.5%, to $6.08, within a 52-week range of $3.90-$9.39. Either investors don’t see these companies improving much with lower prices for cotton or, more likely, investors don’t believe that cotton prices will continue to fall.

Corn and wheat are both trading down today as well. Corn is down about -2.4%, to $7.3825/bushel and Chicago wheat is again below $8/bushel, at $7.965, while Kansas City wheat is barely below $9/bushel, at $8.995.

Corn prices could be following crude prices today, which are also down slightly. As the summer driving season approaches in the US, a traditionally high-consumption period for gasoline and ethanol, high pump prices could keep US drivers off the road, reducing demand for corn-based ethanol.

It is worth keeping an eye on commodity prices going forward because there is a good chance that the fall in commodity prices will continue if the rapid price rises are not fueling inflation. The US Federal Reserve has taken a lot of heat for ignoring higher food and energy prices, claiming that these are mostly fluctuations in supply and demand and that US core inflation remains below 2%.

If commodity prices continue to drop and headline inflation reverts downward toward core inflation, then the Fed will be vindicated in its interpretation of what’s been happening with commodity prices. The losers will be investors who have poured billions into commodities over the past few years, and especially the past year or so.

The Teucrium Corn Fund (NYSE: CORN) is down about -1.8%, at $45.41, within a 52-week range of $23.79-$48.77. The PowerShares DB Agriculture Fund (NYSE: DBA) is also down less than -0.5%, to $33.93, within a 52-week range of $22.85-$35.58.

Paul Ausick