July 7, 2009 – The Commodity Research Bureau Continuing Commodity Index tracks the price of seventeen commodities. It made a new record this past week. It also surpassed 600 for the first time, ending the week at 611.51. So it is clear that the bull market in commodities is alive and well. But these new highs force us to ask the all-important question, how much more is left? The short answer is ‘a lot’.
The accompanying chart of the Commodity Research Bureau Continuing Commodity Index will be familiar to the long-term readers of these letters. It will also be familiar to everyone who has been following the regular alerts that I post to the GoldMoney website.
For example, here is what I said in my post on January 6, 2004. It was written just as this index was breaking out of its long-term consolidation channel which had confined it since the early 1980s (delineated by the dashed, red parallel lines).
“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.”
A few months later I followed up on that alert in these letters. In Letter No. 342 published on April 5, 2004 I wrote about the potential that commodities offered. It’s a lengthy quote, but I want to include it here because it provides a description that, as it turned out, was predictive, but more importantly, one that remains accurate to this day. :
“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.
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.“
The CRB Index was 281.49 when I penned those words. This index closed at 611.51 this past Friday, a more than two-fold gain in slightly more than four years. But I wrote something else in Letter No. 342 that I would like to quote.
“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.”
The CRB Index is only 89 points away from that 700 target. So on the face of it, we have to recognize the possibility that the run in commodities is nearing an end. However, a lot has happened since 2004 that needs to be considered.
For example, “Bubbles” Greenspan has been succeeded as Federal Reserve chairman by “Helicopter Ben” Bernanke, who earned his moniker by commenting that dollars could be dropped from helicopters to inflate the money supply if need be to prevent a deflation. His moniker is well-earned. Bernanke has been pumping up the money supply at unprecedented rates of growth.
Bernanke’s actions stand in marked contrast to what then Federal Reserve chairman Paul Volcker did to end the 1970s commodity bull market. Volcker kept raising interest rates to convince the markets that he was serious about saving the dollar from an inflationary collapse. He eventually succeeded when real, inflation-adjusted interest rates exceeded an exceptionally high 6%. The above chart shows what Volcker’s commitment to save the dollar did to commodity prices.
Bernanke of course is doing the exact opposite, lowering interest rates to try keeping the over-leveraged economy from imploding. Inflation-adjusted interest rates today are negative. So it is easy to understand why commodities continue to soar.
More importantly, the writing is on the wall for the dollar, and people increasingly understand what that writing says. The dollar’s purchasing power will continue to be inflated away. The dollar will be debased under Bernanke, notwithstanding the so-called strong dollar policy repeatedly mentioned by Treasury Secretary Paulson, the president and everyone else in Washington who has anything at all to say about the dollar. Events the past few years have proven this rhetoric to be hollow and void of any substance.
As a result, there are countless people today who understandably see commodities as an alternative to the dollar. In other words, they would rather own $1 million worth of copper than have $1 million sitting in a dollar-denominated bank deposit or debt instrument. Commodities are the best way to preserve purchasing power in an environment when fiat currency is being inflated away.
Another difference between now and 2004 is the unrelenting demand for commodities from China, Brazil and India. The economies of these countries continue to surge ahead, demanding all types of commodities that are required to build everything from basic infrastructure to consumer products. What’s more, the growth in these countries looks set to continue, so it is reasonable to expect ongoing demand for commodities from them.
It is therefore clear that the current commodity bull market is being driven by factors different from those in the 1970s. As a consequence, it is reasonable to conclude that the CRB Index has much further to climb than the 2-1/2-times increase experienced back then. In fact, unless meaningful action is taken to strengthen the dollar – and not just lip service about a ‘strong dollar’ policy – the bull market in commodities will continue until the dollar collapses. And given how badly the dollar is being mismanaged, that moment is probably not too far away.