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February 14, 2011

Commodity Decline on the Horizon

Investing in commodities seems to be all the rage these days, and this attention should make any seasoned commodity investor very nervous. Only a few months ago, commentators on financial television routinely scoffed at calls for higher commodity prices. We now see commodity charts... and calls for higher prices... integrated into the daily entertainment. This enthusiasm, in fact, is appearing right on cue.

CRB Weekly

The first three cycles in this commodity bull market spanned roughly 2½ years, trough to trough. The third cycle was shortened to 2 years by an extreme selling event. Cycle theory suggests that the current cycle... which is now pushing 2 years... should run long to balance the short nature of the last cycle. We can therefore reasonably expect to see the CRB form a significant low in late 2011 or early 2012.

The question then turns to spotting the current cycle peak so as to side-step a major drawdown, and for that trick, we turn to the dollar. As I've mentioned in recent posts, the dollar is due for a 3-year cycle low during the second quarter of 2011. While detailed analysis of the dollar cycle is the purview of the Member Letter, one could note that the dollar low is anticipated to form in either April or June, depending on how the current intermediate cycle plays out. A June low would, in fact, play perfectly into our expectation of seeing commodities decline into a multi-year low around the 3-year mark from the 2009 low.

A June low would also coincide with the end of the Fed's current counterfeiting program, and I suspect commodities will have risen enough by then to induce considerable pressure on Bernanke to at least temporarily halt his malfeasant activities. The dollar would then perform its typical, strong rally out of a major low, setting the stage for a commodity decline.


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