Coffee reached 12-year highs this week as poor harvests throughout Latin America sparked concern that caffeine addicts worldwide might not be able to get their fix. Sensing the potential for supply tightness, investors have bought coffee futures over the last two weeks, driving the price up from 40 cents per pound, a 30% rise. The last time that the coffee market had major supply concerns, the price ran up to $3.18 per pound - a price target that has many market bulls salivating.
Chinese Purchasing Power Rocks Markets
Last weekend, China's announcement that it would change its currency policy moved financial and commodity markets worldwide. The Chinese government indicated that it would allow its currency, the yuan, to appreciate, or rise in value on the world market. Many foreign nations had been pressuring the Chinese to take this step, alleging that by holding the value of their currency artificially low, the Chinese government allowed Chinese manufacturers to compete unfairly in global markets by dumping cheap goods on foreign markets.
With this policy announcement, it is more likely that the price of Chinese goods will rise over the long haul. Another consequence is that the Chinese will be able to buy foreign products at a lower price. Immediately after the Chinese news story broke on Sunday, traders bought commodities across the board hoping that the Chinese would follow suit. Soybeans, crude oil, copper, and gold all hit 5-day highs immediately following the news.
However, within hours of Monday's opening, many of the "bulls" lost their steam, and markets that had been bought on the news story began to sell off. Corn, crude oil, stocks, and silver all fell victim to this "reversal" -- each ended closing down on the day after having reached highs earlier in the day.
The most dramatic example of this phenomenon was the gold market, which reached all-time highs at $1266.5 on the news. By late afternoon on Monday, the market sold off dramatically to $1231, a 2.7% pullback during the day.
After the wild swings on Monday, many of the markets recovered and rallied through the week to close higher on Friday. As of Friday midday, gold was trading at $1254 per ounce, July soybeans were at $9.58 per bushel, and August crude oil had rallied to $79 per barrel.