Don’t Fear the Commodities Crash

Thursday, 05 May 2011 02:37 PM

By David Skarica

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The commodities pullback shouldn’t be feared. It should be welcomed.

Here is the thing about long-term bull markets. Most people are too impatient to profit from them. Part of the problem is the media is so short-term oriented. They look at things from a day-to-day time frame.

Wall Street isn’t much better. Wall Street executives’ pay is based on quarter-to-quarter and year-to-year performance, so they hardly look further out.

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However, the fact of the matter is big cycles travel in patterns of 15 years to 20 years. Like commodities in the 1970s or stocks in the 1980s and 1990s.

Riding those bull moves is how you make money. By my estimate, the commodity bull market has another 5 years to 10 years left in it.

However, we are very overdue for a correction. I feel that the weakness the past few days is the start of such a correction.

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Here are the reasons why:

• I have stated in the past that the year 2008 for commodities was like 1987 for stocks. A short crash. The 1987 crash was followed by new highs by 1989 and then a 20 percent correction in 1990. The 2008 crash was followed by new highs in 2010. I think 2011 will be like 1990 in that we will see about a 20 percent to 25 percent drop in commodities.

• Emerging Markets are tightening. India, China and other nations are willing to admit rising commodity prices are inflationary, unlike the U.S. Federal Reserve, where some officials are in denial about it. Most new demand is coming from emerging markets, so I expect their tightening will hit demand.

• The trades were becoming too one-sided short the dollar and long commodities. Let’s clear some of the speculation out.

• The Fed won’t start QE3 right away. This will cause a dip in commodities. However, I expect by the end of the year or early next year, the Fed will launch QE3 and we will see inflation go up again.

All signs point toward a commodity pullback.

I would think that the Commodity Channel Index (CCI), which peaked around 691, will pull back to the 550 area, at which time I would buy commodities strongly in anticipation of the big dollar crisis that should hit in 2013.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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