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In early April I wrote a commentary titled "Commodity Boom? You Ain't Seen
Nothing Yet!" in which I hypothesized that
commodities would maintain investment leadership through the end of the
decade and the rally would end in spectacular fashion in early 2010. This
would be consistent with a "decennial pattern" of leadership which
began in the 1970s with each decade's winner roughly doubling the stupendous
gains of the prior decade's winner.
This largely reflects the increase in
the rate of money creation since the total abandonment of the gold standard
which occurred 37 years ago this week. All of the money which did not flow
into plant and production (or absorbed by productivity gains) had to flow
somewhere. In the 1970s commodities was the winner, followed by the Nikkei in
the 80s, the Nasdaq in the 90s, and commodities again this decade. With the
strengthening of the US dollar and the wholesaled dumping of commodities I
decided to check the performance of the Nasdaq Composite in 1998 for clues
relating to whether commodities have indeed peaked and the decennial pattern
had fizzled. Take
a look at the chart below:
 
Whoa! Check out that 33% decline from
mid-July to early October! Next, look at the chart of un-hedged gold stocks
below:
We see a similar drop in gold stocks
that we did in the Nasdaq in the "8-year" of the decade. In
addition, the low occurred at support levels established two years prior to
the selloff. If the chart below is indicative of what we can expect for gold,
then investors should be backing up the truck:
You can see that the 1998 Nasdaq dip
represented the trade of a phenomenal trading opportunity. Shares quadrupled
in less than 15 months (peaking above 5200). Because each successive decade
has seen a doubling in the effect of gains I think that it is possible that
the HUI rises 8-fold from its ultimate low.
While the Nasdaq low did not occur until
the end of October, I think that the gold stocks may be within days of
reaching its low as seasonal lows tend to occur during the month of August.
Gold stocks have also been correcting since March; the 1998 Nasdaq correction
did not begin until well into July.
Other commodities are a tougher call,
though I do expect them to also bottom within months before beginning one
last rapid ascent. The rally, in my view has occurred in phases. The first
phase for the commodity rally began in earnest in late 2002 and ended in the
Spring of 2006. These were the "early adapting" investors. The
second phase of the rally started in late 2006, ended this Spring, and was
marked by the entrance of institutional investors. The final phase will be
propelled higher by the retail investor much like many of you remember them
piling into tech stocks one decade ago.
You see nothing really changes,
especially in a fiat currency world where every country is trying to print
more money than their neighbor. On a cautionary note, the deflationists who
follow Keynesian economics will be able to make the case that the world's
deteriorating economic situation (see my article of a week ago) will cause aggregate demand to fall off a cliff and
prices for commodities to plummet. And the chartists clearly have the
deflationary wind at their backs to further make the case that the
commodities rally is broken.
So the case for gold and commodities
requires a little faith. You have to have faith that the combined efforts of
the US and other central bank government money machines will create and enact
truly heroic money printing policies to combat the gales of deflation. The
inflationary monetary effects should more than offset the effects of any
aggregate demand destruction on price as they force investors to plough into
tangible assets as safehaven, driving their prices higher. Another
potentially inflationary development is the return of the Russian menace
which threatens to stall if not reverse the process of globalization and,
more importantly, threatens to destabilize much the world's supply of oil and
natural gas. We need to also consider the inflationary effects of increased
missile defense systems and other military apparatus expenditures that we can
expect to counter Russia's aggressive actions.
Some analysts and strategists called
last week a "watershed event" as the game changed from inflation to
deflation after US CPI was seen reaching a peak above 5% with lower gasoline
prices expected to lead the index lower from here on out. I think we can
expect a deflationary scare, but the bottom line is that the inflationary
trend will resume and the decennial investment pattern will resume. You
should be adding to precious metals positions in preparation for the final
rocket-boosting phase of the rally.
Excerpted from the 8/18/08 Global
MegaTrends Portofolio's Newsletter:
To learn more about Kurt's Kasun's Global MegaTrends Portfolio, click here.
Kurt
Kasun
www.greenfaucet.com
A contributing writer to
GreenFaucet.com, Kurt Kasun writes a high-end investment timing
service, GlobalMacro, which is focused on identifying opportunities that produce
returns in excess of market with reasonable risk. He is strategically located
in Washington, D.C., a key to maintaining contacts and
relationships which help Kurt understand global policy and economic factors
as they emerge. His investment approach has always been macro in nature
largely due to his undergraduate studies at the U.S.
Military Academy
at West Point (B. S. National Security, Public Affairs, 1989) and his
graduate studies at George
Mason University
(M.A. International Commerce and Policy, 2006).
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