Printer Friendly

eMail Article

March 11, 2005

CRB 300 Breakout!
by Adam Hamilton

As a diligent student of the markets I always find their various machinations intriguing and worthy of study. But it really isn't too often that something truly exceptional and exciting transpires. Thankfully the past couple weeks have heralded just such an epic event in commodities.

The flagship CRB Commodities Index is now trading over 300 for the first time since February 1981, a dazzling 24-year high! Multi-decade extremes are exceedingly rare. And since most investors only have three or four productive decades in which to build their fortunes, events like this are often once-in-an-investment-lifetime occurrences.

The CRB initially inched above 300 about two weeks ago on February 25th, barely sneaking above this fabled benchmark. Then for the next 8 days in a row it continued to carve new bull-to-date highs, creating a 9-day consecutive daily winning streak that in and of itself is quite extraordinary in any market. And with the CRB now 4%+ over 300, technicians can consider this breakout "decisive", the real deal.

This CRB 300 breakout is really a monumentally important event that validates the ongoing secular bull market in commodities. Back in early 2001 when I first wrote about the Great Commodities Bull of the 00s near the secular bottom all of this was just heretical theory, but thankfully today this bull is an indisputable reality.

The original theory and the now confirmed reality were built on a simple thesis. Global commodities demand was and is growing relentlessly yet global production capacity in most commodities just cannot keep pace. And whenever we have demand growth increasing faster than supply growth the inevitable free-market response is rising prices. Higher prices help bring supply and demand back into balance by encouraging new production while discouraging greater consumption.

Commodities demand is growing for a variety of reasons, but the great industrialization of Asia is certainly the primary one. About half of the world's population lives in Asia and has never experienced anything like the abundant material standard of living that we take for granted in the States and Europe. As the rise of Asia gradually increases the local standards of living, the per capita consumption of virtually all major commodities will probably eventually approach first-world levels.

China is the greatest example of this phenomenon, as a recent Earth Policy Institute report pointed out. The Chinese collectively already consume 40% more coal, 68% more meat, and 148% more steel each year than the United States. A fascinating subsequent EPI report just published this week, while unabashedly environmentalist in focus, ponders the impact on commodities if the Chinese per capita income of $5k eventually reaches the US level of $38k.

At 6% to 8% growth rates in China's economy, conservative numbers given China's record and potential, the country could reach US per capita income levels by 2030 to 2040. If this indeed happens, and Chinese consumption patterns approach those of us Americans, then the impact on commodities demand will be staggering. Lester Brown of the EPI calculates that China alone would then consume 2/3rds of the entire world's current grain harvest, 4/5ths of current global meat production, 1.12x the world's current coal production, and 1.25x today's global oil production. Wow!

Against this compelling backdrop of relentlessly rising global commodities demand, we have a world commodities production infrastructure that is largely antiquated and obsolete. After the last time the CRB fell below 300 nearly a quarter century ago, investors gradually became disillusioned with investing in commodities producing companies. For the next two decades commodities fell out of favor while a powerful bull market in general equities blossomed.

As commodities prices fell, many producers went out of business while most surviving ones did not have adequate capital or incentive to maintain world-class infrastructure. Investors were so enamored with the tech boom that "boring" old raw materials were neglected and forgotten. Thus today's rusty and inadequate commodities infrastructure will require hundreds of billions if not trillions of dollars of new investments to spin up production to meet booming demand. This process will take a decade or more.

For investors this coming commodities boom remains in its very young stages. Great market cycles tend to run 17 years or so from trough to peak, and our current secular commodities bull has not even reached one quarter of this expected maturity yet. This bull will probably prove to be the single most compelling investment and speculation opportunity of the next decade and vast fortunes will be won by prudent contrarian investors.

Today's dazzling CRB 300 breakout we are witnessing, along with the earlier breakout above long-term resistance about a year ago, provides the crucial hard technical evidence that backs the fantastically bullish fundamentals. This week I would like to take a technical look at this initial foray back into the rarified realms of commodities pricing above CRB 300.

Both of our charts this week are updates from last autumn's "Real Commodities Bull", which describes in some depth the paramount importance of considering inflation while analyzing long-term price trends. When we adjust the CRB index for inflation as measured by the very conservative US CPI (which tends to lowball inflation), it reveals a commodities bull still in its infancy.

Great bull markets are often said to "climb a wall of worry", and thanks to the financial media the fears of greatly overpriced commodities are already being sown. When the mainstreamers fret about 24-year CRB highs, they are considering the blue nominal line above. Indeed, if you refuse to adjust for inflation the venerable CRB is traveling in rarified realms and looks quite toppy.

But ignoring inflation in multi-decade secular trend analysis is just plain naive and foolish. A dollar today won't buy a fraction of what it would in 1980 at the last secular commodities peak. Thanks to the reckless and unaccountable Fed, the broad money supply of dollars has rocketed by a staggering 5x since early 1980! Thus our pricing environment today is totally incomparable to decades past unless inflation is considered.

The red real CRB line above is the CPI-adjusted line, again conservative since CPI growth rates are intentionally lowballed by government statisticians to minimize growth in the welfare payments that are indexed to them. In real constant-2005-dollar terms, the CRB actually topped above 750 in early 1980, vastly higher than today's 300ish CRB levels. In fact, today's commodities prices are just hovering around the levels of the mid-1990s in real terms which is certainly a far cry from the topping hysteria the mainstream media is now advancing.

Just as secular equity bulls and bears tend to run for decades, so do secular commodities bulls and bears. In nominal terms commodities ended a brutal 21-year bear in October 2001. In real terms this same bear stretches to 27 years when the Fed's relentless debasement of our savings and currency is considered. The length of this preceding bear is important as it highlights just how long commodities-producing infrastructure investment has been woefully neglected.

In addition, bulls and bears tend to be symmetrical in length. Just like the congruent individual bullish and bearish 17-year secular trends that make up one Long Valuation Wave cycle, the young secular commodities bull now underway is likely to run for a length of time similar to its antecedent bear. Therefore the several years of secular commodities bull-dom that we have witnessed so far are likely just the very beginning.

Commodities in general probably have a huge way to run yet not only in terms of time but in distance up. We are now only running about a third of the real price levels of early 1974 and well under a half of the real CRB levels of late 1980. In a normal investment-driven bull market we at least ought to return to the real CRB 500 levels of the mid-1980s, and if the public gets involved and foments a speculative mania we could even see new all-time real highs above CRB 1000 briefly. The best is almost certainly yet to come in either case.

Next time someone tries to convince you that commodities are already near an all-time high, realize that they have to live in some surreal fantasyland if they think a dollar in 1980 is even remotely comparable to a dollar today. In real terms, absolute purchasing power terms, commodities haven't even clawed much back above their three-decade lows of late 2001 yet.

While the big strategic commodities picture, both supply/demand fundamentals and secular technicals, remains fantastically bullish, this near-term chart shows a potential interim top approaching. All secular bull markets flow and ebb, marching two steps forward before retreating one step back to regroup. Commodities are no exception.

Since the 2001 lows, the CRB's technical bull-market uptrend has been unmistakably bullish and textbook-perfect in precision. It is fairly rare to see a major index consisting of diverse components trend in such a tight range without any significant technical outliers for several years in a row. This strict trend reflects relentless global commodities demand growth outpacing world supply growth with no signs of abating.

This chart also creates huge problems for deflationists, those who believe commodities prices are due to head to new real secular lows even below those of the great 2001 bottom. The only way prices could fall so deeply in today's asymmetric supply/demand environment is for the world's fiat money supplies to vastly decrease, which will never happen as long as powerful central bankers continue to draw breath.

Strictly, deflation is a decrease in money supplies which leads to a decrease in general prices as relatively less money chases relatively more goods and services. Yet, central bankers will never willingly reduce monetary supplies since currency debasement and inflation is an insidious stealth tax necessary to help the vast welfare-state governments continue to grow without levying more unpopular direct taxes on their citizens.

The neatly rising commodities prices shown above indicate more money competing for commodities, not less money. Some of the arguments in favor of general deflation can certainly be compelling, but the hard unassailable technical evidence in the CRB price chart does not even reflect the slightest hint of shrinking money supplies hammering basic raw materials prices. The reality does not bear out the theory.

As I mentioned earlier, all bulls take two steps forward before retreating one step back to regroup. The CRB index had major corrections in early 2003 and early 2004 that temporarily dragged it back down from its upper resistance to its lower support. Today the CRB is once again near this very same upper resistance line, greatly increasing the probability that another healthy bull-market correction is in the works for the coming months.

In fact, the recent sharp rise in crude oil helped propel the CRB up in its steepest upleg in this bull to date in just the past month. Never before in this bull has the CRB rocketed up from support to resistance in a single sharp move. Since the CRB is calculated as a geometric index intentionally designed to smooth out individual component-commodity volatility, it usually moves with all the sound and fury of a glacier. The recent blisteringly fast spike was really quite extraordinary.

The steepness of this slope alone, coupled with the statistical rarity of nine consecutive trading days of new CRB bull-to-date highs, certainly argues strongly for an imminent correction. Such a correction would probably follow precedent and ultimately lead the CRB back down near its lower support, currently running around 285 or so. Thus, there is absolutely nothing at all to fear technically if the CRB does indeed temporarily retreat back under 300 in the weeks ahead.

Another valuable technical perspective can be gleaned by looking at the CRB in Relativity terms. Relativity is a technical tool that considers the relative dearness or cheapness of a price technically relative to its underlying 200-day moving average baseline. It is calculated by dividing a price by its 200dma, yielding an indicator expressing the price as a ratio of its 200dma. In trending bull markets, the farther away a price stretches above its 200dma the higher the probability that a short-term correction is due.

In the CRB's case, the top of its relative range bull-to-date has been remarkably consistent. Interim CRB tops, or at least breathers in major uplegs, have occurred when this flagship index was trading at 1.133x, 1.129x, and 1.138x its 200dma. This week the CRB was already up to 1.119x its 200dma, not quite to the previous interim topping levels but certainly getting close.

If you are an active speculator who trades the CRB directly via futures or options, you probably ought to consider closing longs or ratcheting up stops when the CRB approaches levels 13%+ above its key 200dma support. On the other hand the best time to throw long or buy call options, without a doubt, is always when the CRB languishes near its 200dma like it did briefly in early January. After this next expected correction the CRB will probably once again kiss its 200dma and present another awesome buying opportunity.

For investors and speculators who aren't playing the futures game, the most sought-after commodities speculations are the stocks of major commodities producers. The higher commodities prices run, the greater commodities producers' profits grow. Indeed if production costs remain relatively fixed but commodities selling prices rise, profits can rise exponentially ultimately driving stock prices to staggering new heights.

Among commodities in general, and commodity-producing stocks, oil, gold, and silver have always proved to be the most alluring to investors and speculators. I suspect that the greatest equity gains in this ongoing secular commodities bull, which will be hugely leveraged and ultimately vastly dwarf the gains of the underlying commodities themselves, will occur in the elite ruling trinity of oil, gold, and silver producers.

When mainstream investors, and indeed the general public, think about commodities the first that come to mind are always oil, gold, and silver. As more and more investors finally understand just how powerful and long-lived this secular commodities bull will likely prove to be, they will plow ever increasing amounts of capital into all commodities producers but the classic romantic commodities of oil, gold, and silver will draw the lion's share.

Interestingly, the order in which these three elite commodities are usually thought of by an investor also corresponds to their relative riskiness. Oil producers are low-risk plays as far as commodities go, but their expected returns are vastly lower than risky commodities like silver. Silver, on the other hand, is probably the most volatile and highly speculative major commodity in existence. Silver producers are high-risk plays but their potential rewards could certainly be legendary.

Gold lies in the middle of this risk/reward spectrum, a smaller and more volatile and risky market than oil but far larger and less risky than silver. I think that every investor and speculator interested in commodities, regardless of their individual risk tolerance, can build a suitable commodities bull portfolio out of some individually acceptable combination of elite oil, gold, and silver producers.

At Zeal we have been actively investing and speculating in this commodities bull since its very beginning. We have spent the last five months or so aggressively investigating various elite commodities producers ranging from well-established majors down to promising juniors. Our current portfolio includes an unknown oil junior starting to thrive, several already profitable layers of trades in elite silver-producing stocks, and a brand new gold-stock campaign just launched in anticipation of the next major upleg in gold.

If you are interested in riding this commodities bull to potentially enormous gains by mirroring our own carefully researched trades, please join us today. My partners and I have been studying and trading this bull for its entire lifespan and we will continue to diligently study and trade it until it draws its final breath probably many years in the future.

Brand new first-time Zeal Intelligence e-mail PDF edition subscribers will get a complimentary copy of the current March issue of ZI just published on March 1st. In it I technically screened the most promising junior gold miners as well as recommended five new positions in elite gold and silver companies, all of which ought to thrive in this commodities bull. It is certainly not too late to buy any of these outstanding companies.

The bottom line is that even though the CRB just broke 300 and is trading at quarter-century nominal highs, in real terms commodities prices remain near rock-bottom levels. Commodities prices are likely to continue higher into the future until long-neglected global production capacity can finally meet soaring world demand. Given the vast amounts of capital necessary to make this transition, this trend is likely to run for another decade or more.

Slowly but surely the unpopular notion of a new secular commodities bull is gaining wider acceptance. As more folks come to understand its potential power to make them very wealthy, more and more capital will compete for and bid up commodities related investments. Buying in today will probably be analogous to buying technology stocks in the late 1980s, when prices were low before the public fell in love with the tech boom of the 1990s.

By the looks of things, the Great Commodities Bull of the 00s is just getting underway and the best is probably yet to come. The dazzling CRB 300 breakout confirms this is the real deal. Please don't squander this stellar once-in-an-investing-lifetime opportunity!

Adam Hamilton, CPA
Zeal LLC.com

Do you enjoy these essays? Please help support Zeal Research by subscribing to Zeal Intelligence today! &www.zealllc.com/subscribe.htm

If you have questions I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/financial.htm for more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I WILL read all messages though, and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

Copyright © 2000-2009 Zeal Research

Image rendition and html coding Copyright © 2000-2009 SafeHaven.com

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »