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.