Dec 5, 2006 – The CRB Continuous Commodity Index closed at 408.79 on November 30th, an all-time record high. This new high means that the correction in commodities is over, and prices are resuming their long-term uptrend.
Consequently, hindsight tells us that we have just finished another correction in commodities. It is just one of the corrections that we have lived through since this bull market in commodities began several years ago.
Take a close look at the following chart of the CRB Continuous Commodity Index.
I last presented this chart in my Kitco commentary on July 7th, A Commodity Bull Market Update. I recommend re-reading that commentary for background information. You will note that I have made one change to this chart.
I have added the five identical red circles to the uptrend on the right side of the chart to emphasize an important point. The correction that we just experienced in commodities is not new. In fact, there have been four similar corrections over the past few years.
The upshot is that the bull market in commodities has not ended. The so-called commodity cycle is not over. There is not undue speculation in commodities, and to repeat one of my favorite themes, commodity prices are going a lot higher before this bull market is over.
The reason for this bull market in commodities will surprise no one. It’s the US dollar. There are people around the world who would rather own $1 million worth of zinc or copper or soybeans or any other commodity than $1 million in a bank account, and for good reason. The purchasing power of the US dollar is being inflated away, and this inflation will no doubt worsen in the weeks and months ahead. But zinc is zinc; the value of zinc and every other commodity is based on their utility, and that utility cannot be inflated away.
Commodities are valuable regardless what happens to the dollar, and what has been happening is not good. Inflation is severely eroding the dollar’s purchasing power. What’s more, the US dollar’s exchange rate is again falling against the euro, pound and other major currencies as well as against gold and silver.
The US is spending more than it is earning. It is borrowing more than it is saving. These trends cannot continue, and something has to ‘give’. That something will be the US dollar, so diversify out of it. Dump your dollars. Hold commodities instead. While any commodity will do, the best commodities to protect your wealth from the ravages destroying the dollar are gold and silver.