Where's the Floor for Commodities?

04/25/2013 8:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

The sharp slide in gold and other commodities has many wondering where they will eventually bottom. MoneyShow's Jim Jubak has some suggestions for how investors should act.

Right now, everyone would like to know where the floor is. The floor for the market as a whole, of course—where is the S&P going to stop?—but also for individual commodities.

So Brent, which was once the European standard for crude oil prices and now it’s sort of become the de facto international benchmark, is around $100 a barrel. People are saying well, at that point, does OPEC intervene? Does this represent the bottom? Is there some kind of floor being put in there?

In so many other places in the market, there is no floor. I mean, who knows how low gold can go? We’re at $1,350 or $1,370, down from $1,900. People are going, well, it could go down to $900, maybe $1,100, maybe $1,200...people don’t know.

This "not knowingness," if you will, makes people reluctant to put money in. If you were certain that $100 is the floor for oil, you’d buy oil stocks or you’d buy oil—you’d invest at that point. But since you don’t know, and since you’re worried about not being able to know, it makes a certain reluctance.

It means that the likelihood is this market will overshoot the fundamentals, whatever the fundamentals are, and go down to a point where people say this is really, really too cheap to resist. Or until we get some kind of story that reverses these expectations.

Right now, pretty much no matter where you look people are looking for a floor, not finding it, and willing therefore to sit in cash because they really don’t know. Not so much that we’re going to see a huge, huge fall, but they’d really like to get the bottom, rather than 10% from the bottom. So people are sitting on the sidelines waiting to have some kind of inkling of where the floor might be.

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