The Mega Commodity Price Move: Why it's Happening

The precious metals have been soaring. Gold prices, silver prices, platinum prices, palladium prices… you name it. If it’s a metal, it’s been booming. The same is true of other commodities too.

So are commodities the new bubble? Have they replaced the real estate bubble, which replaced the tech stock bubble, as investors move from one bubble to another? It sure looks like it. But the big difference is that this metals and commodities bubble has a lot further to go. Why?

THE PERFECT STORM

Basically, the perfect storm has been gathering and it’s going to fuel a mega rise that will likely last for years to come. We’ve often discussed the most important reasons why but since these markets have been picking up steam, we’ll review these basics again.

Most important is China and other growing nations, which are keeping demand and prices super strong. But also important are spending, soaring global money creation, inflation, the falling U.S. dollar and international tensions. But let’s take China first…

China power

China’s growth has been astounding at over 9% each year for more than 25 years. During that time, China has lifted 300 million people out of poverty and it’s quadrupled the average income.

This is the fastest economic growth in recorded world history. Many felt it couldn’t last, but year after year it has, and it’s going to continue.

Since wages are higher in urban areas, 500 million rural Chinese are expected to move to the cities over the next couple of decades in search of the good life that former migrants have already found. This growing middle class is proudly spending money on homes, cars and other consumer goods.

Retail sales, for instance, recently soared 20% and China has become the world’s second largest oil consumer. This huge demand for all things, from food, to oil, gasoline, metals and other commodities has been one of the main factors driving these markets higher.

The Chinese government’s top priority is to close the gap between rich and poor. And they want to make a big splash on the world stage as a major power during this year’s Olympics. But something more important is also happening.

As Time magazine points out, comparing China to the U.S., China is cramming two important eras into one. The post World War II prosperity that fueled the flight to the suburbs is coinciding with the 19th century Industrial Revolution that lured people from the farms to the cities.

This is powerful stuff. Demand for everything is huge and there’s no end in sight. This reinforces that the mega commodity uptrend will continue.

Demand growing

That’s especially true combined with another source of growing demand, which is new money looking for good returns. With stocks and real estate down, the metals and commodities have become increasingly attractive, and with good reason.

The metals have gained between 12% and 30% so far this year. Commodities are up between 9% to 26%. These markets have strongly outperformed all other investments. They are also stronger than any currency, and with the U.S. dollar super weak at new record lows, it makes the metals even more attractive.

Supply limited

Then there’s the supply factor, which is critical as well. While demand is soaring, supply is limited. It’s also consistently threatened by international tension or internal mishaps.

Considering it takes many years to develop new mines, this supply picture is something that’s not going to change quickly. The recent electricity shortage in South Africa, for instance, drove many metals prices sharply higher because miners simply couldn’t work and supply was therefore disrupted.

Also, don’t forget that events in areas rich in natural resources, like the Middle East, Russia, Nigeria, Venezuela and many other places, could push the price of metals, oil and other commodities sharply higher in a heartbeat, depending on what happens in these countries. Basically, world tensions are truly a big wild card.

Spending & money: Out on a limb

A real biggie, however, is spending and money creation. That’s the cause of inflation and there’s no end in sight here either.

Spending is skyrocketing. The military budget alone will be the biggest since World War II. The baby boomers are now starting to retire and since 20 million of these upcoming retirees don’t have enough money to retire on, it’s going to balloon spending to far greater levels in the years ahead.

Meanwhile, money is flowing like mad all over the world. Money supply is up 16% in the U.S. but it’s even more in other countries… it’s soaring 42% in Russia, 21% in India, 18% in China and so on.

And with the whole world worried about a U.S. recession, as well as the domino effects of the subprime mortgage meltdown, which has already tallied up losses of around $200 billion (so far only half of what’s expected), the money’s going to keep flowing, all in a concerted effort to avoid a recession at all costs.

You see, a recession could turn into a deflation, accompanied by massive bank failures, and that’s something no one wants. Sure, all this money is fueling inflation and the commodity boom. And yes, lower interest rates are making the U.S. dollar super unattractive and driving it to new all time record lows, but low rates will help the economy.

The bottom line is that this inflation option is a whole lot better than the deflation option, and that’s what the Fed and the world’s central banks have chosen to do. They really have no other choice.

Inflation growing

Remember, gold has always been an inflation hedge. With money flowing, oil above $100 and commodity prices soaring, inflation is surging too. It’s moving up at the fastest pace in 26 years, which is not surprising when you see the CRB commodity index hitting record highs (see Chart 1).

This is also making the precious metals very appealing and it’s one of the most important components in this overall big picture (Chart 2). So despite normal ups and downs, the major trends are clearly up, and there’s no reason to believe that’s going to change.


HAVE ALL COME TOGETHER

That’s the perfect storm in a nutshell. All these factors have come together at the same time, and they’re extremely bullish for gold, the other metals and commodities. These are the reasons why the metals and commodities markets are rising and why they’ll keep rising.

Interestingly, these factors are also coinciding with the 200 year commodity cycle, in which bull market upmoves have averaged between 17-22 years. Currently, we’re only seven years into the current bull market, so this too coincides with the fundamentals, reinforcing that these rises still have years to run.

That’s why we’ve continued to stress keeping a large portion of your investments in gold, silver and their shares. No investments have been better over the past few years and we feel strongly that these markets will remain winners.

We wouldn’t trade these markets and this month’s strong upmove illustrates why. Just plan to stay with the mega upmove for the long haul. Essentially, the storm is getting stronger and that’s not when you want to be jumping ship.

Gold Price Near $1000

The gold price is soaring. It’s quickly closing in on the all important $1000 level but most people are looking elsewhere.

The economy is the hot topic and everyone’s talking about recession. Opinions are running rampant, discussions are endless and this is making people nervous. The Fed is very nervous too.

FED TO THE RESCUE, AGAIN

As signs became obvious that the economy was in serious trouble, the Fed hit the panic button. This followed steep drops in the Dow Industrials and sharp declines in several of the other world stock markets. Knowing the importance of these market signals and probably fearing a crash, the Fed abruptly slashed interest rates.

As we’ve often said, when push comes to shove, the Fed will do whatever it has to do to keep the economy afloat and to avoid a recession. That was clearly illustrated last month and if there was any doubt before, it’s now more obvious than ever that the Fed has been, and will continue to take the inflation path. This is not only true of the Fed but of all the world’s central banks.

As you know, money has been pouring into the system for quite a while now. Credit is cheap and it keeps getting cheaper. Money is now also going to be given away to over 100 million people in the U.S. to the tune of about $150 billion. It’s even going to be given to people who don’t pay taxes, all in the hope that they’ll spend this money to help ward off a recession.

If that doesn’t do the trick, we’re sure the Fed and the government will come up with more inflationary ideas, and if this results in more inflation and an even weaker dollar, and it will, then so be it. There’s really no other choice.

GOLD TELLS THE STORY

As our good friend Chris Weber sums up… “Investors are being handed engraved invitations to protect their wealth by getting into the prime inflation hedges: the precious metals. The way I see it, pain is inevitable in an economy that has lived beyond its means for decades, and borrowed to make up the difference. Any pain that is forestalled by cheap money and credit is going to be balanced out by the greater inflation to come. And that is exactly what the precious metals markets are signaling.”

Whether the economy ends up falling into recession or not, there’s no question that gold is benefiting based on what’s happening. It’s risen strongly since 2001, it’s currently at a new record high and it’ll continue to move higher (see Chart 1A).


In fact, gold, silver and most of the gold shares are about the only markets to show significant gains so far this year. This too is illustrated on Chart 1.

As you can see, gold is hitting new, or multi-year highs against the euro, the Dow Industrials, bonds and oil. In other words, it’s stronger than these other markets. Gold is outperforming them and the percentage gains are greater in gold compared to all of the other markets.

Simply put, gold is where you want to be. Silver is super strong too. These are the best markets, and if you’ve been banking on other markets, then you’ve probably been disappointed. That’s why we’ve consistently stressed keeping a large part of your investments in gold, silver and their shares. We also think it’s important to keep a good portion in cash, in the strongest currencies.

UNCERTAINTY & CONCERN

If a recession does materialize, it’s going to slow demand for most items because consumers will be cutting back. Already we’re seeing signs of this. A recent poll showed that most people plan to save their economic stimulation checks, or they plan to use them to pay down debt. If they do, that’s not going to help the economy much, but a lot will depend on sentiment at that time.

For now, sentiment is down along with consumer confidence. Consumers are concerned about their jobs, a recession, housing prices, high oil prices, and even the falling stock market. They’re feeling uncertain about the future and as long as that’s the case, it’ll keep a break on the economy.

At the same time, however, stocks have been moving up. The stock market is obviously pleased with the sharp interest rate cuts and the stimulation package. The market is still cautious and it’s not out of the woods. But the stock market looks ahead and if it continues to rebound, this will be a positive signal for the economy, indicating that the Fed will probably be successful in avoiding a recession or a worst case scenario, as it has in the past.

KEEP AN OPEN MIND

This of course is contrary to what most experts are saying. For dozens of reasons, the majority feel we are not only going into a recession, but that it’s going to be a severe one. Some are talking about the beginning of the end of the financial world as we know it.

We’ll see what happens but over the many years we’ve been in this business, we’ve noticed that, when all is said and done, things rarely end up as bad as they may seem. Even though there may be many valid reasons why a worst case scenario could evolve, it rarely does. Markets survive, economies survive, people make money and they lose money, markets move up and they move down, change is inevitable but that doesn’t have to mean disaster is coming.

Most important is to keep an open mind and stay flexible. Allow for surprises and don’t stubbornly hold onto an idea because you think it’s right. The markets will tell us what’s happening and if a market changes, we’ll change with it.

KEEP YOUR GOLD POSITION

As for gold, it should do well in either scenario. Gold rises during times of uncertainty, it rises during times of inflation and easy money, it rises when the dollar is weak, and all of this is currently keeping a strong foundation under the gold price.

So again, keep your gold for the long-term. It’s today’s best investment and it’s been a great investment for years. Despite normal ups and downs, we strongly believe you’ll be glad that you continued to hold onto your gold, and of course your silver too.

Record Gold Price Highs Keep Coming

The gold price surged above $850 to new record highs as the new year began. This is exciting but gold prices could become even more exciting now that they are in uncharted territory.

GOLD: The little known jewel...

Most investors haven't been paying much attention to the gold price. Even though it's gained 28% consistently each year on average since 2001, the mainstream generally hasn't noticed.

Last year was not an exception. The gold price gained 33% in 2007, which was almost five times the gains in the Dow Industrials. But surprisingly, the majority are still focused on stocks. We think that's going to change, probably this year.

Record highs always attract attention. When this happens, the market will usually start getting more media attention, investors take note and they start asking questions.

Case in point... our mom isn't interested in the markets. But recently for the first time in years she asked us about the gold price hitting a new high because she read about it in the local newspaper.

...AND A STRONGER PHASE HAS BEGUN

This "mom" barometer is a good one and you can bet that others are now looking at gold too. New highs attract new buyers, propelling the market quickly higher. It's very likely that gold's upward momentum will now continue to build and if it does, it wouldn't be unusual for the gold price to approach $1000 in the current upmove.

We'll see what happens. But as you can see on Chart 1, by breaking above its 1980 high at $850, gold's potential is wide open. It's entering a stronger bull market phase and technically, gold could keep rising until it reaches the top of its nearly 40 year mega channel.



This of course could take time but that may end up being gold's ultimate upside target in this long-term, primary bull market, which has so far taken gold from $255 in 2001 to $930. And gold may go even higher if it breaks out of its channel like it did in 1980.

If that sounds crazy, it's not. Keep in mind that prices aren't what they used to be. In other words, the gold price would have to rise to about $2200 when adjusted for inflation to equal what $850 was in 1980 (see Chart 2). So it's all relative.




BULLISH BACKGROUND FOR THE GOLD PRICE

The main factors driving gold prices higher have been the record high oil price, along with the huge rises in food and other commodities.

Aside from oil, the price of wheat and soybeans, for instance, nearly doubled in 2007. This has fueled inflation concerns, which pushed gold higher because it's the ultimate, historical inflation hedge.

The turmoil in the credit markets has also been bullish for gold prices. Since it's widely expected that this will result in even lower interest rates to help boost the economy, it'll mean an ongoing U.S. dollar decline. And since gold and the dollar move in opposite directions, the declining dollar has been a big plus for gold.

GOLD IS THE ULTIMATE SAFE HAVEN...

Gold has also risen due to its safe haven status in reaction to growing international uncertainty and tensions, especially in the Middle East. But there's more, and we believe these new factors could also be important in fueling gold's bull market rise this year and beyond.

First, are the new developments in China, which has just become the world's second largest gold consumer. That is, Chinese demand is growing and in recent years we've seen what's happened to many markets when Chinese demand intensifies... they soar.

Plus, China just opened up gold futures trading and the exchange is prepared for big demand. With the Chinese stock market softening, one top fund manager expects China's wealthiest investors will pour into the gold market, driving the price much higher.

...AND DEMAND IS GROWING

If gold ETFs are any indication, this could very well happen. streetTRACKS Gold (GLD), for instance, now has the eighth largest gold holdings in the world. And in the third quarter of 2007, ETFs bought 15% of all the gold produced.

Plus, inflows into these ETFs surged over 600% compared to a year earlier. That's very impressive and it's also establishing a solid foundation for gold's bull market.

MEGA SHIFT TO HARD ASSETS UNDERWAY

The rise in gold is part of a larger phenomenon that's been sweeping the globe. It involves a mega shift that happened in 2000 from financial assets like stocks, to hard assets like gold, other metals and commodities. These mega shifts are rare. They don't happen often and they tend to last about 20 years.

As you know, the rise in commodities has primarily been driven by the booming growth in China and other emerging nations in recent years. This has fueled massive demand for all commodities.

As these countries continue growing and expanding their infrastructure, it's going to keep pushing these markets higher in the years ahead and we believe that'll be the main factor behind this mega, multi-decade upmove in commodities, which in turn will keep upward pressure on gold.

CLIMATE CHANGE: An influence

Another factor is climate change. This too well likely become increasingly important in the years ahead, especially driving food prices higher.

The year 2007 again broke records for natural disasters, which have become more common over the past decade or so. Unfortunately, the world has been very slow to take action on global warming, despite all the evidence and emerging facts.

Last year, for instance, England had it hottest April in nearly 350 years and there were droughts in Asia, Australia, Africa, the U.S. and Europe. Dry weather pushed soybeans to a 34 year high, and it drove up the price of corn and other commodities (see Chart 3). Again, we'll likely be seeing more of this in the upcoming years.



The point is, gold has been a super, consistently profitable investment for years. It's in a long-term bull market rise. The major trend is clearly up and it's strong. The fundamentals are solid, the technicals look great and as long as that's the case, gold is headed much higher.

Mega Gold Price Move Underway, Stay With It

As we enter 2008, the gold price is hitting a new record high. That’s a great way to kick off the new year and it looks like there’s a lot more to come. Why?

This commodity upmove is over six years old, yet it’s still young and it’ll likely last another decade before it’s over. The falling dollar has certainly given the commodities a boost and there’s really no reason why the dollar will strengthen next year, which is a positive sign for the commodities.

But it’s important to keep in mind that this is not just a reflection of the weak dollar. Most telling is to see the commodities in a strong currency, like the euro. Chart 1 shows this clearly. Be it oil prices, gold prices or the commodity index, they are all rising in a strong currency.


This is most impressive because it shows that a true commodity upmove is underway.

GOLD PRICE RISE IS SOLID

The Gold Price is now at a new high in U.S. dollar terms. It’s also at record highs in other currencies.

This reflects a strong rise, yet most people don’t realize that gold’s at a record high within an almost seven year old bull market! Gold’s been up every year since 2001, and 2007 was not an exception. Gold gained 31% in 2007, yet most investors do not own gold. That’s going to change. As higher gold prices begin to attract attention, investors will notice and they’ll jump in too. That’s when the gold price will start soaring. That’s not happening yet, but it will and probably sooner rather than later.

Steps about complete

If gold stays above $850 it will have completed its fourth step of the bull market. Chart 2 shows that gold entered the fourth step in December 2005, when it broke above $500. That in itself was a milestone and gold started to break away from the dollar. The gold price has been rising steadily since then. By staying above $850, the steps will be complete and gold will be entering a new stronger phase of the bull market.



Gold stronger than many markets

Gold has a lot going for it. It’s strong compared to several currencies, and it’s stronger than the stock and bond markets.

Chart 3A shows that gold has been stronger than the Dow Industrials since 2000. This was a major change and the trend in the ratio clearly favors gold on a mega trend basis. The ratio reached an intermediate low last July while the indicator (B) was at a gold too low area. Both have been rising since then showing that gold has been outperforming stocks and it’s poised to stay stronger.



There are many reasons why gold’s bull market has further to run, and the ongoing political and financial uncertainty in the world are just two important reasons why. Recent events in Pakistan have further reinforced this.

Gold is a safe haven, which is why demand is rising. Even though gold’s bull market turns seven years old in February, it’s strong and solid, and a buy and hold strategy is the best way to make the most profits… ride the mega-major wave to completion and keep in mind that the long-term trend has a lot further to run.

by Mary Anne & Pamela Aden