Saturday, November 1, 2008

The Bull Has Now Grown Stronger

We are currently in a long term secular bull market for commodities, and we are currently in the mist of a short term violent pull back that has provided a gut check for long term investors. This pull back has come due to two main factors:

1. Dollar Strength - As previously discussed in detail, the current deleveraging process has forced investors into cash causing a vicious spike upward in the dollar

2. Credit Crisis - Also discussed in length has been the effect of hedge funds managers needing to sell anything and everything right now to stay alive. There is always a market for commodities, unlike mortgage securities, and they have sold off their good assets to stay alive.

What we have not talked about is how this affects the look of this secular bull market moving forward. I think the recent sell-off has presented unbelievable buying opportunities. There are two main reasons for this:

1. The Dollar - To respond to this crisis, Ben Bernanke has more than lived up to the name "helicopter" as he has dumped money from the sky. This is only his opening act, however, and the amount of money he will inject by the time it's over will be staggering. This would be bad enough alone, but he has a US government working along his side with their massively destructive bailouts. These two together have set the stage for the final collapse of our currency, which will have the reverse effect on commodities that you are seeing today.

(It's interesting to note right now that as the dollar continues to climb, all the major commercial banks have begun taking enormous short positions against it.)

2. Supply - As prices fall for commodities it becomes both unattractive and in some cases impossible for producers to supply new product. They cannot produce goods at a profit and will shut down operations. Global production of lead, zinc, and copper for example have seen tremendous recent declines. This decline is coming at a time when inventory levels for commodities across the board are at historic lows. Normally it is the exact opposite; inventory levels will be high to cause a price decline like we've seen.

These two factors are creating a perfect storm for the next leg up in this market. As all the dollars currently being created make their way into the system and foreigners finally cut off the lending binge to our country, the dollar will collapse and the currencies of the rest of the world will simultaneously rise. No longer having to pay for our consumption, they will now be allowed to use that capital, and their newly strengthened currency, to continue their industrial explosion.

This will come at a time when there are no inventories and production has been crushed. This will be horrifying for our country in terms of oil. Every day prices remain low, alternative solutions get pushed to the background and our leaders focus on other issues. By this time next year you'll begin to see the true oil crisis for America. The same will be true for agriculture and water on a global scale, as the fight for resources will have begun.

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