Commodities: Though Hit Hard Recently, Bulls May Yet Return

Commodities were hit hard in July, and the sell-off has continued into August. Led by the energy complex, commodities reached extremely overbought conditions a month ago, and were due for an intermediate-term correction. Key commodities are near significant support levels (e.g. $110/barrel for oil and $860 for gold), which we suspect will hold, given our view that commodities remain in a secular bull market driven by powerful demographic-driven demand trends and inflationary monetary policies.

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Despite the headwinds of a slowing global economy, the commodity bull market is unlikely to end while negative “real” (i.e. inflation adjusted) interest rates prevail in the U.S. and China.  Moreover, the efforts of the government to stimulate the economy, bail out insolvent companies, and backstop bad mortgage debt invariably involves inflation in one form or another, defined as debasement of the currency, generally though the government borrowing new money into existence.

Historically, the commodity best suited to protect investors from such policies is gold. As the bailouts and stimulus plans continue, we expect that gold will, again, begin to anticipate the effects that these inflationary policies will ultimately have on the purchasing power of the currency. Accordingly, we are considering increasing our allocation to gold, either by enlarging our position in the SPDR Gold Shares (symbol: GLD) or by establishing a new position in the Market Vectors Gold Miners ETF (symbol: GDX).

 

Comments

[Kunst:]

About that $860 support for gold...

2008 Aug 17 01:28 AM

[oldman:]

"Key commodities are near significant support levels (e.g. $110/barrel for oil and $860 for gold), which we suspect will hold"

Well, so much for that prediction, at least for today, 8/17/2008, now $788.

2008 Aug 17 10:59 AM