When I first sat down to write this article, I just wanted to inform my existing client base that I am very bullish on commodities. Imagine that, a commodity broker, bullish on commodities. Well, it’s true. I see these current price levels as good buying opportunities across the board. I’m confident that within six to 12 months we’ll look back and wish we had bought more commodities.
I think the driving force behind this commodity rally will be the weakness in the U.S. dollar. The dollar has already begun to correct and move lower, sliding against the euro for three months and seeing losses accelerate recently against commodity-driven currencies such as the Australian and Canadian dollars. The ICE Dollar Index futures contract, which measures the dollar’s performance against a basket of six global currencies, hit a new low for the year on June 1. I think that this is just the beginning of a longer-term trend. Commodities are dollar-denominated and will typically rise in price as the dollar devalues.
We cannot keep printing money and not pay for it somewhere, somehow. We already have historically low interest rates. We have a new administration in Washington that is on a spending spree trying to stimulate the economy. We have a currency that is rapidly losing value. That sounds like “hyperinflation” to me. Now, I do realize that inflation is not yet a concern for our policymakers, but I think it’s coming and commodities will be the place to be. Being long commodity futures is an inflationary hedge.
Do you remember last summer before the economic crisis began? We saw historic price levels in crude oil at $149 a barrel, corn at $8 a bushel, wheat at $13 a bushel and gold over a $1,000 an ounce…just to mention a few. I think this is the beginning of another big bull run for commodities. I’m not saying that we’ll shatter records this year, but I do believe prices will be somewhere between today’s levels and last year’s levels by year- end 2009. Next year and the year after that–look out! Hyperinflation! We are a nation of spenders.
Green Shoots = Commodity Gains
You probably have heard a lot of talk lately about all the “green shoots” sprouting up everywhere. Those are the early signs of a recovering economy, and I see them too. The market is looking forward to a brighter future. While most of the recent data has not been that great, it could have been worse. Some has even been better than expected. A very important report is Consumer Confidence, and the report for May showed a surge to 54.9 percent, from 40.8 percent the previous month. Let’s face it; without consumer spending, the economy can’t recover. April’s Existing Home Sales report also showed an increase of 2.9 percent. On the manufacturing side, the Institute for Supply Management’s factory index rose to 42.8, the highest level since September, from 40.1 in April.
To reiterate, now is the time to start getting long commodities. We’ve already seen some big moves; crude oil futures have hit a seven-month high above $67 a barrel, and corn, wheat and soybeans likewise all hit seven-month highs already this month, so be careful and don’t overtrade. If you’ve been sitting on the sidelines waiting for the markets to bottom, consider dipping your toes in the water. It’s warm. I think we have not yet seen the highs, although volatility will probably increase and we should see some more ups and downs with bigger ranges moving forward. I advise you wait for a bounce in the U.S. dollar; watch for move to somewhere between 80-82 in the ICE Dollar Index futures and then buy a dip in commodities. I expect this pattern to continue, and if you are uncertain as to how to approach these markets, work with me! I don’t think you need to chase anything.
If you need some guidance, feel free to call me. I have a variety of strategies you can consider based on your account size, goals and risk-tolerance; one of them might be suitable for you. Don’t miss this opportunity to get long commodities near the bottom of what could be a powerful run ahead.
Frank J. Cholly is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at fcholly@lind-waldock.com.
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