It is hard to argue that the bull market in commodities will not return with a vengeance. When the financial crisis struck, turmoil in the capital markets around the world ensued, sending commodities in particular down well below their real market prices, many of them still yet to recover. Due to the ongoing systematic solvency crisis following a complete de-leveraging of the system, there remain incredible distortions in real market prices. Aside from the supply-demand disconnect in several commodity groups, prices will surge due to fiscal and monetary malfeasance by governments around the world.
Massive inflation is being created in the largest economies of the world. As confidence is lost in fiat currencies, individuals will flee from paper money into real assets. Given the difficulty of making an accurate forecast, many and possibly all of them could be far off. I can say with a high degree of confidence, however, the commodities listed below will all be substantially higher by the end of 2011.
Gold - I expect gold to test the $1025 – $1050 level as people look to delay capital gains taxes for another year. In any case, I see gold trading between $1050-$1200 for the first quarter or two. The bull market will once again take hold, propelling gold to another new record ($1300-$1400), The fourth quarter will be reminiscent of this year (gold up $250 in a two and half month period this quarter). Gold will make another record high before year end ($1500-$1650).
Oil - It should feel some selling pressure as well, somewhere in the low-mid 60s. Should worsening economic data be released, oil could go back to the low-mid 50s. Oil will trade between $70-$85 until Q4, at which point inflationary expectations will begin to drive up prices, making oil top $100-$110/barrel.
Silver - It will finally see the 2008 high broken (Q2), reaching $25/oz before the summer doldrums. Like Gold and Oil, silver will breakout in Q4 reaching $26-28/oz.
Natural Gas – The future for natural gas is extremely bright. Add some inflation expectations into the mix and I expect natural gas to trade back up between $6.50-$7/mmbtu (latter half of the year).
Gold - Will likely start 2011 with a sell-off, but resume making new record highs. Gold will be range bound between $1750-$1900 until Q4, when it tops $$2100/oz.
Oil - With inflation expectations on the rise, Oil will reach the 2008 high, before resuming the upward march in 2012.
Silver - I can easily see silver appreciating another 50%, around $40-42/oz. This is only possible, however, if inflation expectations are present. I don’t see how this can be staved off past the end of 2011, but it might take until the latter half of the year. $40 is actually a conservative measurement given the historic gold: silver ratio during inflationary times. This ratio is 16:1, but given the fact I don’t expect inflation to be kicked into full gear, I would think 35:1 would be appropriate. So even if you thought Gold will top out at $1500 oz, silver could still easily see $43/oz.
Wheat - Expect wheat to outperform all other commodities in 2011 (see below). During periods of inflation food prices rise the fastest.
Cotton and Corn - If you believe oil is going much higher, then so will corn and cotton as substitutes for oil among other things.
Natural Gas - Natural Gas will see double digits again reaching $10-$12/mmbtu.
I'm not bullish on commodities as a whole solely due to inflation, but I am on commodities with strong underlying fundamentals which have also historically risen much faster than inflation. Below are links to previous articles discussing some underlying fundamentals of:
Disclosure: Long Silver and Wheat Futures