Some See a Top for Commodities, the Charts Tell a Different Story

While the number of articles calling for a major top in the commodities continues to increase, along with the fears of recession, the charts tell a different story.

Of course, it is natural to expect hard asset prices to take a knock if recession does come and consumers tighten their discretionary spending. However, though the fundamentals may be slowly brewing for a recession, as ever it is a matter of timing rather than merely calling up the fundamentals as expert witnesses.

Indeed, economists are notorious for failing to see recessions coming in advance so one may also argue that no recession is forthcoming if economists say it is coming! With that I want to show two charts courtesy of Reuters and the Commodity Research Bureau who have wisely collated the data on various commodities since 1947 onwards.

The first is their chart for the CRB Precious Metals Sub Index. I show it below with a clear Elliott wave in progress.

A very nice and clear impulse wave is in progress and has been so since 2001. Waves 1 and 3 have dutifully completed and now as this index makes new all time high from its peak in 1980 we anticipate wave 5 to be at least as strong as the preceding waves as investors pile in for one final fling. Since waves 1 and 3 covered nearly 200 points each, we can see wave 5 at least hitting 900 if not 1000. Moreover, waves 1 and 3 lasted about a year and a half each so we anticipate this wave will ride well into next year. As if to give its vote of sympathy to this pattern, the CRB Energy Index is also indicating this bullish pattern as we show below.

The impulse wave for this energy bull market is I would say even clearer with more marked counter moves for waves 2 and 4 (I think “counter” is a better word than “correction”). The textbook strength of wave 3 is clearly evident here but we suspect wave 5 could be just as bullish as a final blow off ensues. Wave 5 is well underway for energy commodities and again the relative size of the waves suggests a run well into 2008 again.

So despite fears of recessions or irrational exuberance in the commodity markets, we envisage one final profitable leg up for precious metals and energy before we enter a rather protracted period of counter moves.