July 7, 2006

A Commodity Bull Market Update

I’ve been using the following chart of the Commodity Research Bureau Index for years as I have always viewed commodity prices to be an important measure of overall price levels and the purchasing power of the dollar. Because of its importance, I often use this chart in my presentations at investment conferences as one way of showing what is happening to the dollar.

Commodity prices are a good indicator of whether the dollar is inflating, dis-inflating or even deflating. There are no signs of deflation anywhere on this chart, nor should there be. There is no dollar deflation, and there hasn’t been any dollar deflation since the 1930s.

Rather, this chart shows those periods when the dollar was rapidly inflating or just slowly inflating. There are no other results. For decades the dollar has been inflating; the only difference over this period has been the rate of inflation.

Importantly, this chart is valuable for another reason. It clearly makes the point that we are in an era that is essentially identical to the 1970s. First, compare the disinflationary downtrend channel (red dashed lines) of the 1960s to the similar pattern that confined the CRB Index in the 1980s and 1990s. Then compare the green uptrend line marking the 1970’s inflation to the green uptrend line marking the rise in the CRB Index that has been occurring in recent years. See the similarities?

History is repeating. Not only do we have today the same harmful impediments to sound economic growth [i.e., monetary debasement and inflation] that prevailed back in the early 1970s, the chart is tracing a pattern that is a mirror image of that earlier period.

In January 2004 I used this chart in a commentary posted on the GoldMoney website.
The breakout from the downtrend channel had just happened. Here is what I wrote back then: “The CRB Index has broken out of the downtrend channel that has confined it for twenty years. Not only are we in a commodity bull market, we are in a new era. Look for the CRB Index to continue climbing from here, just like it did in the 1970's. The ongoing collapse of the dollar is creating many profit opportunities. Buying commodities is one of them.”

In addition to providing confirmation of the trend in commodity prices, I have used this chart in two other ways. First, it provides an upside price target. From its low to high in the 1970’s, the CRB Index rose about 3½ times, roughly from 100 to 350. If the CRB Index were to again rise about 3½ times, it would climb roughly from 200 to 700.

One other way that I have used this CRB chart in the past was to show that we are in the “early stages” of a commodity bull market. Well, I can no longer claim that it is the “early stages”, given how far commodities have already climbed. But if the history of the 1970s repeats so that we reach my price projection of around 700 for the CRB Index, it is reasonable to maintain that this commodity bull market still has a long way to go. The CRB Index closed on June 30th at 385.63, a new monthly high close, up 1.5% from the previous month and a very healthy 10.9% gain year-to-date, but still far short of 700.

The CRB Index would need to almost double from here to reach my 700 target. That’s still a long way from its present price, suggesting that there is still a lot left in this commodity bull market. And maybe this target understates the true potential of commodities. So commodities still represent an attractive opportunity for profit, but there is an even a more important factor to consider. There is still plenty of profit opportunity by taking your money out of financial assets and putting your money into things, and I continue to recommend doing exactly that.

The long-term prospects for the US dollar remain bleak. I have therefore been recommending that one hold tangibles instead of dollar-denominated financial assets. View commodities to be an important diversifier in your portfolio and one way of helping to protect your wealth. It makes more sense owning a pound of copper than $3.25 in cash. It makes more sense owning a barrel of crude oil than $74. It makes more sense owning an ounce of gold than $620. It is better to own commodities than dollar-denominated financial assets.

Yes, the commodity bull market is alive and well, and it is doing what all bull markets do – climbing the proverbial ‘wall of worry’. In other words, there are all kinds of reasons to think this commodity bull market has already ended. Just pick up any business newspaper or turn on the TV. You will hear all kinds of reasons to get out of commodities now, most likely from the same pundits who were telling everyone years ago that commodities were an unsustainable ‘flash in the pan’. But that is what bull markets do. The bucking bull makes it easy for you to stand aside so that it takes along with it as few people as possible. That is the nature of all bull markets.

The commodity bull market is climbing that troublesome and nerve-racking wall of worry, and there is no doubt that it is indeed climbing. Despite all of the negative talk about commodities, the CRB Index has closed higher in 5 of the 6 months so far this year. That’s an impressive measure by any standard, even for a bull market.

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James Turk is the Founder & Chairman of GoldMoney.com. His latest book is The Coming Collapse of the Dollar.