Are you ready for inflation to again become the big story? Buckle up, because this is going to be an epic ride--similar to the dollar collapse and commodity boom we had in early 2008.
First of all, the set up. We are currently experiencing the biggest short-term stock market rally since the Great Depression. We have seen the S&P 500 index rally from 666 in early March of 2009 to over 1700 recently.
While the party may not be completely over, it certainly appears to be nearing its end. This 20-year chart of the S&P 500 index makes this more evident.
Before you get concerned though, let's look at the bright side. First off, there are reliable ways to protect one's wealth and profit from a falling stock market. Before the bear market is too far along, it will make sense to take a defensive stance by moving into treasuries (TLT) and eventually shorting the market (HDGE), but I don't believe we're there yet.
At the present time, all evidence suggests to me that the place to be invested are in assets that benefit from rising inflation expectations. In fact, everything right now is perfectly set up for a temporary collapse of the dollar and a massive rally in commodities, their producing companies and their exporting countries.
It's important to remember that the last time the stock markets reached all-time highs and began to decline. At that time, we experienced the dollar collapsing, while commodities and emerging markets exploded in value. Here's a chart from that time showing the S&P 500 index in red and crude oil represented by (USO) in blue.
After the absolute slaughter that gold has experienced this year, I think it can be almost guaranteed that it will set a new all-time high over the next 8-12 months. My article from mid April, "Gold: The Recent Collapse and Approaching All-Time High" provides the argument for this and I'm sticking with my minimum target of $2,100 despite gold dropping even lower in June. The more extreme prices move in one direction, the more then tend to move in the opposite direction when the trend changes.
Of course, in late 2008, everything (but treasuries and short funds) collapsed in value, so we don't want to get caught up in thinking the upcoming commodity boom will last forever. Case in point, in late 2008, oil plummeted 75%, silver plunged 55% and even gold dropped 30%. I don't know about you, but I prefer getting out of the way in advance of those kind of losses.
Since my article in April, the US dollar appears to have peaked in early July and has now fallen well below its 50-day moving average and failed to hold, as you'll see below.
Regarding gold (GLD), after an extreme sell off, the price finally appears to have bottomed in late June and has broken through its 50-day moving average and is holding above.
Besides commodities themselves, I believe the stocks of their producing companies are about to become red hot over the upcoming months. Gold mining funds like (GDX), (GDXJ) and (GLDX) appear to have begun massive rallies as has the silver mining fund (SIL). I believe these funds will more than double from their recent lows over the next 8-12 months.
Here are charts for GDX and GDXJ with their 50-day and 200-day moving averages shown in red and green respectively. As you'll see, GDXJ would more than triple in value by simply returning to levels we've seen in the past twelve months.
Now let's look at the Smart Money and what they've been doing. Corporate insiders-executives, directors and major shareholders were recently buying the shares of their own companies at multi-year highs. Commercial traders have also been betting on higher commodity prices at multi-year extremes. These two groups are among the few successful investors year after year, so it makes sense to model their behavior.
Emerging markets also appear to be great opportunities right now. Investment manager and frequent CNBC guest, Michael Gayed has impressed me since I began following his work in 2011. When we spoke a few weeks ago, he pointed out how India's currency, the Rupee hit an all-time low versus the dollar. This is incredibly bullish for Indian equity fund (SCIF).
Another indicator that we are at the turning point for emerging markets is that we've seen riots in countries like Turkey (TUR), Egypt (EGPT) and Brazil (EWZ). In case you missed it, last year the crisis and unrest in Greece represented the best time to buy European stocks. And of course, the "Occupy Wall Street" protests represented the best time to buy US stocks in 2011.
Besides oil and gold, in early 2008, the buzz was all about "the Ags" and "the BRICs." The Ags were agriculural commodities and their producers (MOO). The BRICs are Brazil, Russia (RSX), India and China (FXI).
Before I end off this article, I wanted to mention something odd I've noticed recently. That is that gasoline prices have been falling despite oil prices rising, as per the two graphs below.
Whether this is deliberate or not, I believe its effect is to confuse as many people as possible about what's really happening in the financial markets. Far more people are in tune with the price at the pump than futures prices. By the time most investors realize that we're in another commodity boom, they'll have missed most of the gains. By the time the media and public are unanimously bearish on the dollar and bullish on gold, we'll know it's time to sell. And that's what contrarian investing is all about.
Thank you for following me here on Seeking Alpha. Enjoy the commodity boom and be sure to get out before it busts. The next drop is likely to be a nasty one.