The Case for Commodities

There is an interesting article in the current issue of Barron's entitled "The New Bull Market: Commodities will do well for years to come". It is written by Jim Rogers, a former hedge-fund manager with an exceptional track record.

The title pretty much says what the article is all about, and I am bringing it to your attention because I wholeheartedly agree with its conclusions. The case for commodities is very compelling, and Mr. Rogers uses one of my favorite examples in his article. Basically, there are cycles in the markets, and sometimes tangible assets outperform financial assets, while at other times the reverse is true.

For example, in the fifties and most of the sixties, financial assets outperformed tangibles. Their relative strength then changed, with tangibles excelling throughout the seventies into the early eighties. They then flip-flopped again, with financial assets substantially out-performing tangibles until the stock market bubble popped three years ago. Since then, tangibles have been taking the lead.

Commodities are an important segment of tangible assets, with many commodities enjoying deep and very liquid markets. They are therefore an important way for investors to diversify out of financial assets in general, and the US dollar in particular.

Because of the importance of commodities and their apparent emergence in a new cycle, I closely follow the Commodity Research Bureau Index of 17 commodities. The full list of commodities within the index is available here: www.crbtrader.com

The following long-term chart of the CRB Index shows that we are at an important turning point.

There are several important observations that we can make from this chart:

1. Until 1971 commodity prices fluctuated because of normal supply and demand factors, namely, droughts, floods, and other acts of God that result in lean years and bumper crops.



2. With the abandonment of the gold standard in August 1971 and the subsequent debasement of the US dollar, a new era was unleashed. Commodity prices were no longer subject just to the vagaries of their supply and demand. Commodity prices now also reflected the debasement - the loss of purchasing power - of the dollar. Therefore, the 1970's bull market in commodities is as much a bear market in the US dollar.



3. With the attempts of then Fed Chairman Paul Volcker to bring inflation under control in the late-70's and early-80's, commodity prices began to disinflate. This disinflation lasted throughout the 1980's, and stretched into the 1990's as investors focused on the outlandish returns being generated in the stock market.



4. The great reflation engineered by the Fed in the 1990's - as evidenced by the near 70% increase in M3 from 1992 to the end of 2000 - buoyed stocks, not commodities. With the CRB Index at less than 200 as recently as May 2002, some commodities were selling in nominal dollar terms at the same price they did nearly 30 years earlier. Given that the US dollar had lost more than 80% of its purchasing power during that period, it is clear that commodities were extraordinarily cheap.



5. Presently, commodities are in a clear uptrend, as noted by the green line on the above chart. What's more, the CRB Index is poised to break above and out from its long-term downtrend channel. That break-out will signal that the commodity bull market is picking up momentum.

The CRB Index closed on Friday at 251.03, which is essentially the same level it briefly reached earlier this year. The CRB Index looks ready to break into new high ground in the week ahead.

The flight out of the US dollar continues, and commodities are one of the logical safe havens in the search for undervalued tangible assets. And one of those undervalued tangible assets is gold.

Published by GoldMoney
Copyright © 2003. All rights reserved.
Edited by James Turk

This material is prepared for general circulation and may not have regard to the particular circumstances or needs of any specific person who reads it. The information contained in this report has been compiled from sources believed to be reliable, but no representations or warranty, express or implied, is made by GoldMoney, its affiliates, representatives or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report reflect the writer's judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted by law neither GoldMoney nor any of its affiliates, representatives, nor any other person, accepts any liability whatsoever for any direct, indirect or consequential loss arising from any use of this report or the information contained herein. This report may not be reproduced, distributed or published without the prior consent of GoldMoney.