Dear Friends,

Another day, another all time record high in commodity prices as the CCI (Continuous Commodity Index) did it yet again. Corn, wheat and soybeans all put in 30 month highs with wheat now having effectively doubled in price since June of last year.

Brent crude is now trading above $102/barrel and is now back to levels last seen in September 2008. Ditto for Unleaded gasoline. Coffee is at another 13 year high, sugar hit an astonishing $0.36/pound while copper added on more to its record high from yesterday. Cotton is near 140 year highs, last seen during the era following the War between the States.

What makes this feat of the CCI even all the more remarkable is that the meats were down sharply today with the precious metals lower. In other words, the index made a lifetime high with no help from these two sectors which were actually a drag on it. Based on what I can project from the price charts, the CCI is on a trajectory to hit the 750 level within a matter of 4 months unless something arises to stem the rise. It is now currently trading at 659.

We are seeing what amounts to a near perfect storm in the grain markets with a confluence of speculative money chasing after tangibles coupled with difficult growing conditions which is limiting supply. That is occurring against a backdrop of what might best be described as “panic buying” by nations caught up in the social unrest erupting across North Africa and the middle East who are fearful of being caught short handed on grain supplies at a time in which prices are already on the rise. This is creating a type of feedback loop in which demand for the physical product keeps prices strong which then feeds into the momentum brought about by hedge fund money chasing commodities which then feeds back into nations becoming more fearful of not having enough food on hand which then exacerbates the already volcanic tensions that have been simmering beneath the surface of the social fabric of many of those nations and has now erupted into the open.

I repeat – this is the handiwork of the Federal Reserve which is determined to keep pushing money into the US economy no matter how much chaos across the globe they create. Yesterday Rice finally broke out of its long sideways pattern and saw further strength today as now it is making up for lost time. It is now at a 27 month high in price. Rice is a key food in the diet of many of the nations in the far East so there is potential for the same sort of social unrest in some of those nations should this market suddenly catch on fire. Thus far it has not really garnered the attention of many of the hedge funds as it is a relatively thin and illiquid market, but that in itself is no guarantee that it will not become thus.

This is part of the reason that gold has thus far not broken down. Speculative money continues to bleed out of this market for the time being but one wonders how much longer that can continue with the rampant inflation now firmly entrenched in the food sector and beginning to push with more intensity in the energy sector.

Asia in particular is getting hit very hard with serious inflation issues and that is the reason gold demand from that quarter of the globe is so intense right now. They are not as easily duped into believing the stupid assertions coming from the monetary leaders in the West that “inflation fears are overstated”.

Along those lines here are some excerpts from a story in today’s Financial Times out of London (thanks John!):

China on track to become top gold buyer
By Leslie Hook in Beijing and Jack Farchy

February 2 2011 (Financial Times) — China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal.

… Precious metals traders in London and Hong Kong said on Wednesday they were stunned by the strength of Chinese buying in the past month. “The demand is unbelievable. The size of the orders is enormous,” said one senior banker, who estimated that China had imported about 200 tonnes in three months.

Gold prices softened in January on the back of positive economic data in the US, but prices for physical gold in Shanghai have been at a premium of about $20 per troy ounce over those in London, underscoring the tightness in Asian markets.

… This week China’s exchanges are closed for the holidays…

More…

Bonds were lower today and are perched quite precariously just above the lower level of the range that has held them in check to the downside for nearly 6 weeks now. Will the Fed’s buyers come in and rescue them again? They had better or they risk a downside technical breakout which would portend higher long term interest rates. Expect them to immediately pop higher on the reopening of trade this evening.

Click either chart to enlarge in PDF format with commentary from Trader Dan Norcini