Outlook for Commodities Remains Positive

By: Chris Ciovacco | Wed, Dec 8, 2010
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With news of a compromise on extending the Bush tax cuts, recent strength in the U.S. dollar, and signals from China it may raise interest rates, it is a good time to check on the health of weak-dollar assets, such as commodities (DBC). Commodities, especially hard commodities like copper (JJC) and gold (GLD), are often used as a way to protect purchasing power during periods where concerns about future inflation are elevated.

In general, commodities tend to have a tailwind when the U.S. dollar is weak, and a headwind when the greenback strengthens. The extension of the Bush tax cuts could add as much as half a percentage point to U.S. GDP in 2011. Stronger economic growth in the U.S. could propel the dollar higher and put some pressure on commodities.

If we compare the early stages of the last bull market in commodities to the current bull market, it allows us to better assess the ongoing investment merit of copper, silver (SLV), gold, wheat, etc. MACD is a technical indicator used to monitor the strength of a trend. The chart below shows one way to use MACD in the context of the CRB's last bull market.

CRB Index 1998-2007

The chart below allows us to compare and contrast the last bull market (above) with the present day gains in commodities.

CRB Index 2006-2010

While we need to keep an eye on the U.S. dollar, there are currently no major concerns relative to the longer-term investment trends in commodities. Pull backs, and even violent corrections, are to be expected during any bull market. As long as technical and fundamentals factors continue to be supportive of higher commodity prices, we should err on the side of maintaining exposure to this asset class.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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