Will Commodity Prices Rebound?

1. Over the past several months, the commodity markets have feared a worldwide slowdown. We've seen a long string of global interest rate hikes and suffered historic energy prices. It's not surprising that the world economies have slowed and lost momentum. We've seen a massive slide in crude oil prices for the last two months that should have a stimulating affect on the economy, or at least remove some barriers to future growth. Is this the end of the bull market? Not yet, nor should the top come until 2009. This was just an intermmediate high.

2. The U.S. and Japanese economies should begin to improve. This action, along with improving grain prices, may suggest that global economies are not as weak and vulnerable as it has been reported.

3. The current economic situation is not unlike the 1970's when a new word, stagflation, was coined by economists. It refers to economies burdened with higher costs of raw materials and heightened prices of their finished goods. We are in a period where the cost of living is rising as a result of three years of raw material inflation. We will know when equallibrium has passed. It will happen when the PPI (Producer Price Index) has flattened out. Last month, the PPI was nearly flat but only because auto manufacturers were almost giving last year's models away, before the new models hit the showrooms.

4. Gold and other precious metals have been undermined by a couple of things: the decline in world economies as well as the sharp decline in energies, but also, the fear of the central banker selling off gold in Europe under the Washington Agreement which ended September 30th. Fundamentally, gold production appears to be down 8% for the year, whereas global demand has increased another 11%, leaving deficit supplies once again. The hedge funds will not come back in until it goes back over the 200 day moving average.

5. The recent rallies in silver off the mid-September lows have not been stellar, leaving me concerned that the lows may not be set in place. Do not try to hit homeruns in the commodity markets. Right now, share prices for precious metals mining companies are very high.

6. From Gold Stock Bull:
So how does this change the investment landscape? We expect to see gold and energy rangebound until after the elections. We also anticipate that the broader market will continue posting new highs, with the Dow testing 12,000. But the weight of the fundamentals, the skyrocketing debt, the outsourcing of jobs, the ongoing costs of the war and the increased tension with both Iran and North Korea, will eventually break through the patchwork. It is similar to suppressing deep-seeded emotional issues: at some point things will snap. Whatever short-term manipulation is being used to window-dress the economy will only exasperate the falling out that many astute economists have already predicted.

We expect a strong resumption of the gold and energy bull market by year’s end. This will be accompanied by a sharp decline in the broader market and continued weakness of the U.S. dollar. We are holding current positions and have cash ready for this next upleg. All evidence suggests we are going into Wave 3, which is traditionally the longest and strongest wave of any bull market. There will surely be corrections along the way, as we are currently witnessing, but you need only have the patience to weather the storm and you will be rewarded handsomely. We plan to be at least 90% invested before the November elections in anticipation of gold making a new high by the end of 2006 and breaching the $1,000 milestone in 2007.