Commodity Momentum

April 5, 2004 – Take a close look at the accompanying chart of the CRB Index of commodity prices. This chart is familiar to long-time readers. I have also written about it in my GoldMoney alerts. See:GoldMoney.com

In that alert posted on January 6^th I said: “Importantly, the CRB Index has broken out of the downtrend channel that has confined it for twenty years. Not only are we in a commodity bull market, we are in a new era. Look for the CRB Index to continue climbing from here, just like in did in the 1970’s. The ongoing collapse of the dollar is creating many profit opportunities. Buying commodities is one of them.”

This alert expressed the same theme that I have been regularly presenting in these letters for the past few years since the stock market bubble peaked — commodities are in a bull market, and more to the point, history is repeating. As far as the markets are concerned, we are reliving the 1970’s.

Therefore, the door to the future I think can be unlocked by looking at the past. The experiences of the 1970’s point the way to understand our future.

In the three months that have passed since posting my GoldMoney alert, the CRB Index has risen 11.2%. As we look at the accompanying chart, it is reasonable to conclude that we will see several more months of rising commodity prices.

Look how in the early 1970’s the CRB Index kept climbing month after month. It did so for good reason. The dollar had been debased in the euphoria of the 1960’s, a euphoria that was expressed by the 20-year bull market in stocks. But eventually the euphoria was dashed by reality — the reality of a debased dollar, an overvalued stock market, rising debt levels, and other harmful impediments to sound economic growth.

Now look at this chart again to see what is happening today. History is repeating. Not only do we have today the same harmful impediments to sound economic growth that prevailed back in the early 1970’s, the chart is tracing a pattern that is a mirror image of that earlier period.

Note the two downtrend channels (marked by the dotted lines). These represent periods when people were focusing on financial assets, rather than tangible assets. So commodities underperformed in the 1950’s and 60’s as well as the 1980’s and 90’s, as financial assets (particularly manifested by rising prices in the stock market) became overvalued.

Then as the tables turned away from overvalued stocks in the early 1970’s and reality began to set in once again, money moved into the safety of things — commodities and other tangibles, and of course gold. The same thing is happening today.

Note the two parallel uptrend lines, one in the 1970’s and the shorter one reflecting the recent rise in the CRB Index. But as we can also see from this chart, we are still closer to the beginning of this change than to its end.

From its low to high in the 1970’s, the CRB Index rose about 2½ times, roughly from 100 to 350. I expect the CRB Index to again rise about 2½ times. That would take the CRB Index roughly from 200 to 700. Right now we are in the 280 area, so there is still a lot left in this commodity bull market. There is still plenty of profit opportunity by taking your money out of financial assets and putting your money into things, and I continue to recommend doing exactly that.