Taking a long term view
Viewing the short term commodities chart, it is apparent that anything that has risen
like 100% in a relatively short time may be a dangerous purchase because due for
a pull-back.
However, the long term chart below, going back to the
year 1920, tells a different story, namely that commodity prices, adjusted for
inflation, are as low as during the depression of the thirties. before the
recent trend turnaround, prices of basic commodities world-wide had fallen so low that, despite modern
efficiencies, many traded below their cost of production.
A secular rise in commodity prices during the next decade is likely - and
a dead cert. in the longer term.
If "buy low, sell high" makes
sense, then this is the time to buy. That doesn't however relieve the trend
trader of need to select entry point with care, in order to avoid initial heavy
draw-down due to adverse volatility.
As the above chart suggests, the
secular decline in commodity prices has come to an end and a reversal is in
progress. As commodity prices move back up, they will attract
additional investors and speculators into what is a relatively small trading
arena. For example a very small asset
allocation shift by financial oligopolies from stocks/bonds into commodities, boosts commodity prices
significantly. They don't miss opportunities and there is strong evidence of growing sentiment in favour of commodities
(and the fact that commodities markets can be manipulated within the secular
trend 'range' - so hand on to your hat when 'in' and always retain ability to
survive whipsaws).
If
the US dollar continues to weaken, prices will rise to compensate. A rising trend attracts more investors
and speculators who push prices higher still. The process develops into an
unstoppable spiral of rising
prices such as occurred during the 1970s.
The rationale behind rising commodity prices
is simple:
- Demand for basic commodities increases as the world's population (growing
by close to 100 million a year) increases and increasingly demands consumerism
driven 'improved' lifestyles.
- The emergence of China as a super economic power. China will have a large
impact on the world's commodity markets and push up commodity
prices very considerably.
- As a consequence, supply cannot meet demand.
The long-term picture
Prices have moved too far
too fast for the short-term oriented speculator. Those, nevertheless, who do not
possess a trader's mentality and believe in the secular bull-trend,
may well stick to their positions or buy on set-backs which occur especially at
the early stages of a bull-market that could last for at least ten years.
The medium-term to short-term picture
By February 24, we had reached a temporary peak of 251
points and we had to wait until November 2003 to supersede it. Patience, for those who had it, was rewarded. The bull
moved on and reached a new high of 285 points by the end of March 2004.
Then a correction set in, which has brought the index down to the 270 level
or by about 5%.
In May 2004 a lengthy period of consolidation was predicted, similar to that
last year - the
260 to 270 point support area had the capacity to absorb further selling
pressure and the correction
stopped at 260 at the beginning of August.
The short-term picture
The short-term chart shows the following break-out at 290
points and the consolidation which set in when the Index crossed 320.
Consolidation may continue for a while but should
stop at or before the new support level which was the old resistance level. You may well
even have a chance to buy during overshoot below 290 support level. Patience could
(again) be
rewarded.
Based on an article by Peter Zihlman
Commodities News
