Commodity Cycle in Bull Mode
January 21, 2012

A colleague of mine from the office sent me a revealing chart produced by U.S. Global Investors showing commodity returns over the last 10 years. A quick review of their chart yields some interesting tidbits, particularly when combined with the commodity cycle analysis discussed in the Member Letter. Consider:

• The last two years hosting declines into multi-year commodity cycle lows... 2008 and 2011... saw gold lead the pack with rather timid returns.
• All years which did NOT host such declines saw gold perform quite well, but rank well off the top of the list where triple-digit returns... or nearly so... were posted by other commodities.
• Oil tends to post single-digit or negative returns when the commodity cycle is in decline (see 2006, 2008, 2011), but performs fabulously when commodities are in bull mode.

According to my cycle analysis, commodities just left behind a multi-year cycle low in December. Therefore, 2012 and 2013 should put commodities back in bull mode. From this perspective, once would expect gold to perform quite well, but ultimately be outperformed by other resources. Oil should also post double-digit returns in each of the next two years.

I will make one other prediction: the single year performance records set by nickel (+154% in 2006) and copper (+153% in 2009) will be broken in each of the next two years. I don't know if nickel and copper will defend their own records, but I suspect at least one commodity will post a 200%+ single-year return before the next major low, due in 2014.

The commodity bull is heating up again, and the world's central banks are about to reap the rewards of their malfeasant policies.