Betfair Official Blog

Ration books at the ready, as demand is stood up on its hot date with supply...

Daily View - 27th February

With the economies of the world sucking in ever greater quantities of critical commodities, we are now experiencing the classic effects of the first lesson for economics students, supply & demand. In normal S&D curves, as the price of the product rises, either the supply rises or the demand tapers off which reduces the price, and vice versa.

But unfortunately we currently have strong inflation in 'staple' products. Prices in these will have to rise dramatically before consumers limit their use. For all the wailing about the price of fuel or bread I have yet to hear of anyone curtailing their consumption. This has the odd consequence that whereas a slight surplus means weak or stable prices, on the other hand a very (and I mean very) slight deficit can create rampant price hikes. The S&D equation fails to work. Supply is very difficult to increase, and demand is almost impossible to decrease.

Wheat, sugar and corn have all rallied some 15-20% in the last few weeks, and this was starting from a multi-year high anyway. Most staple products have more than doubled in the last few years and there appears to be no end in sight. At what price would you stop eating bread or putting sugar in your coffee? In many households it would have to be a great deal higher than it is now.

It was not much of a surprise to see that whilst the FTSE rallied some 100 points yesterday, retailers and travel were (in the main) left sitting on the shelf. Today sees the FTSE looking to break above 6100 with the opening quote straddling this price at 6099-6100. The 6000 level, which had caused so many problems to defeat in previous rallies, gave up without a fight yesterday as the Banking, Mining, Energy and Pharmaceutical sectors put on a display. The close above 6065 will be giving the bears some cause for concern as this has proved, over the past six months, to be something of a critical support/resistance level.

With January sales seeming to be strong and commodity-inflation so prevalent, the BOE, hawks at the best of times, will probably see no need to cut rates this time around. The hair shirt of monetarism looks set to irritate us for a while longer. This may keep the pound reasonably stable for a while, but if the Trade and Public deficit numbers continue to make grim reading and growth slows below expectations, then the long-term trend is unlikely to be up.

With the dollar weakening significantly, commodities had yet another reason to rally (most are priced in the greenback.) Gold started yesterday on the soft side falling to $926 before the dollar impact started to be felt. We are now at $957.0-957.5 (a new all time high), but in reality the recent fall in the dollar means that from a basket-currency basis, it is little changed over the past week.

Silver on the other hand has gone into overdrive and has moved some two bucks higher in the last week to be trading at 19.30-19.33 this morning - a rally of almost 15% (in gold this would be the equivalent of a move of over $130.) The bulls are in control across the board and it would not be a wise man who stands in the way of the train.