Nikhil Raheja's  Instablog

           Crude Oil prices are a good indicator of the how the economy is doing in general. If the savings and production are high, higher quantities of industrial commodities such as Crude oil are used, while as the production falls, consumption of commodities falls too. Since the credit crisis has only reached midway so far, credit problems suffered by businesses will persist in the next few years, leading to lower commodity consumption and lower prices.

         The United States is a leading consumer of oil in the world. It consumes more than 25% of the total world production of 85 million barrels a day. If the US undergoes a massive depression, it would take huge amounts of purchases of commodities from Asia and Europe for the Demand deficit to be offset. Unfortunately for the commodity bulls, both Asia and Europe are witnessing the same credit crisis and lowered production.  Most of the EU and Asia had a housing bubble, which like the bubble in the US, has not burst completely. As house prices continue to fall across the world, lending institutions would maintain a tight grip over credit, leading to lesser production and consumption. 

          Along with Crude Oil, all industrial commodities with the excepiton of a few are likely to make new lows in the future. Gold and Silver topped in the first week of this month, as was foreseen by many. http://seekingalpha.com/article/141261-gold-silver-during-deflation-sell-the-metals-short 

          Historically, the top in oil has occured a few months after a top in Gold and silver, which usually peak on the same day. 

         The collapse in commodity prices would also lead to a decrease in the Consumer price index, developing into deflation. The $ should gain strength as capital is brought back to the treasuries (bills) from Asia and Europe, leading to a decline in the value of their currencies.

Disclosure : Short Gold, Silver.