Commodities are a hot item and they are set to stay in high demand for years
to come.
The world, especially China, has been growing and using lots of raw materials.
China's commodity imports alone have grown more than tenfold over the past
15 years, as you can see on Chart 1, and so far this year China's oil
imports are up by about 10%. With its robust economy showing no signs of slowing,
demand for commodities will continue to outpace the limited supply in the years
ahead.
Meanwhile, producers have been scrambling to increase supply but it's a slow
process that takes time. In the 1980s and 1990s, for instance, many mining
and oil companies could barely make ends meet with the low prices at the time,
which left little room to expand and open new mines. This has left a gap between
growing demand and limited supply.
Higher prices will eventually slow demand but so far it hasn't. The oil price,
for example, remains near record highs and copper has stayed stubbornly near
its highs, in spite of its 186% jump from May 05 to May 06.
Copper is the best barometer for world economic growth because it's used in
many areas of construction and it remains very strong, but it's not only oil
and copper... Many of the raw materials are also on the rise with nickel now
hitting a 19 year high.
GROWING DEMAND
As for gold, investors are moving into gold, in large part thanks to the exchange
traded funds which makes it easy to buy gold and silver. These funds are enhancing
the bull market and this alone is causing a huge demand in gold that wasn't
there before.
Trading of commodities in general has doubled from 2001 to 2005, while hedge
fund investments in the energy market are up from $3 billion in 2000 to about
$70 billion in 2005. This sector is growing and it's set to continue growing
in the decade ahead. This is part of the 200 year commodity cycle that we've
often discussed. And it's why we will continue to recommend gold, silver and
their shares, as well as energy and resource shares for as long as the major
trend lasts.
OIL: Holding near the highs
Oil
remains strong and frankly, there is no reason why oil will weaken significantly.
On the contrary, the Middle East is the major oil producer in the world. And
since instability persists in the region, the oil price will stay high.
Oil is the base for the world economies today. The largest consumers are the
U.S. and China and world demand is growing by leaps, while supply is mainly
in troublesome areas or areas that are unfriendly to the U.S. Any disruption
in supply or a threat of this will push oil up.
The latest example was the war between Israel and Hezbollah, which kept upward
pressure on oil. Then there's Iran, a huge oil producer, which continues to
create tension over their nuclear program. At one point, they threatened to
cut their oil exports if UN sanctions are imposed and these ongoing tensions
are bullish for oil.
There has also been talk of several countries wanting to buy their oil in
euros. If countries start building their euro reserves (less dollar reserves)
and buy oil in euros, it wouldn't be much of a change for them. But for the
U.S. it would be damaging because it would mean the U.S. dollar would be losing
its reserve status as countries would then hold less dollars in their reserves.
This is already happening to some degree. And if it continues, it would not
only cause the dollar to plunge but it would also be a major problem for the
U.S. debt and economy.
Charts
2A&B shows the close relationship between gold and oil. They tend
to move together. A higher oil price is inflationary and gold rises when
inflationary pressures are present. Since 1999 when oil started its assent,
oil has outperformed gold as you can see on Chart 2C; when the ratio
rises, oil is stronger. This year, gold has been stronger than oil but the
major trend still favors oil, which means it'll likely remain stronger than
gold.
With oil and gold moving in tandem, and gold starting a renewed rise, it's
signaling that both of these markets are headed higher. Oil could easily hit
our $80 target once a record high is reached, while gold is now poised to move
up in a strong rise.
Silver leading gold
Silver's renewed rise is clearly underway (see Chart 3A). It recently
reached a 10 week high and it's leading gold in this renewed rise. Silver's
decline since May reached an oversold area, the most since 2004, which means
silver has plenty of room to rise further while the long-term indicator remains
solidly bullish (see Charts 3B and C).
Silver's major trend is clearly up above $9.40 and it's poised to reach or
surpass the May highs near $14.88. Silver is used in industry and it also plays
a role as gold's little sister in times of uncertainty. This could explain
why silver has been stronger than gold since 2003 and why it's recently been
outperforming gold (see Chart 3D).
Platinum and palladium also remain strong, which backs up the bull market.
When all of the precious metals rise together, the bull market is strong and
that's what's currently happening. So stay invested in these markets and if
you're not in yet, now is a good time to be buying new positions.
