-- Posted Wednesday, 23 August 2006
Courtesy of www.adenforecast.com
Commodities are a hot item and they are set to stay in high demand for years to come.
The world, especially China, has been growing and using lots of raw materials. Chinaís commodity imports alone have grown more than tenfold over the past 15 years, as you can see on Chart 1, and so far this year Chinaís oil imports are up by about 10%. With its robust economy showing no signs of slowing, demand for commodities will continue to outpace the limited supply in the years ahead.
Meanwhile, producers have been scrambling to increase supply but itís a slow process that takes time. In the 1980s and 1990s, for instance, many mining and oil companies could barely make ends meet with the low prices at the time, which left little room to expand and open new mines. This has left a gap between growing demand and limited supply.
Higher prices will eventually slow demand but so far it hasnít. The oil price, for example, remains near record highs and copper has stayed stubbornly near its highs, in spite of its 186% jump from May 05 to May 06.
Copper is the best barometer for world economic growth because itís used in many areas of construction and it remains very strong, but itís not only oil and copperÖ Many of the raw materials are also on the rise with nickel now hitting a 19 year high.
As for gold, investors are moving into gold, in large part thanks to the exchange traded funds which makes it easy to buy gold and silver. These funds are enhancing the bull market and this alone is causing a huge demand in gold that wasnít there before.
Trading of commodities in general has doubled from 2001 to 2005, while hedge fund investments in the energy market are up from $3 billion in 2000 to about $70 billion in 2005. This sector is growing and itís set to continue growing in the decade ahead. This is part of the 200 year commodity cycle that weíve often discussed. And itís why we will continue to recommend gold, silver and their shares, as well as energy and resource shares for as long as the major trend lasts.
OIL: Holding near the highs
Oil remains strong and frankly, there is no reason why oil will weaken significantly. On the contrary, the Middle East is the major oil producer in the world. And since instability persists in the region, the oil price will stay high.
Oil is the base for the world economies today. The largest consumers are the U.S. and China and world demand is growing by leaps, while supply is mainly in troublesome areas or areas that are unfriendly to the U.S. Any disruption in supply or a threat of this will push oil up.
The latest example was the war between Israel and Hezbollah, which kept upward pressure on oil. Then thereís Iran, a huge oil producer, which continues to create tension over their nuclear program. At one point, they threatened to cut their oil exports if UN sanctions are imposed and these ongoing tensions are bullish for oil.
There has also been talk of several countries wanting to buy their oil in euros. If countries start building their euro reserves (less dollar reserves) and buy oil in euros, it wouldnít be much of a change for them. But for the U.S. it would be damaging because it would mean the U.S. dollar would be losing its reserve status as countries would then hold less dollars in their reserves. This is already happening to some degree. And if it continues, it would not only cause the dollar to plunge but it would also be a major problem for the U.S. debt and economy.
Charts 2A&B shows the close relationship between gold and oil. They tend to move together. A higher oil price is inflationary and gold rises when inflationary pressures are present. Since 1999 when oil started its assent, oil has outperformed gold as you can see on Chart 2C; when the ratio rises, oil is stronger. This year, gold has been stronger than oil but the major trend still favors oil, which means itíll likely remain stronger than gold.
With oil and gold moving in tandem, and gold starting a renewed rise, itís signaling that both of these markets are headed higher. Oil could easily hit our $80 target once a record high is reached, while gold is now poised to move up in a strong rise.
Silver leading gold
Silverís renewed rise is clearly underway (see Chart 3A). It recently reached a 10 week high and itís leading gold in this renewed rise. Silverís decline since May reached an oversold area, the most since 2004, which means silver has plenty of room to rise further while the long-term indicator remains solidly bullish (see Charts 3B and C).
Silverís major trend is clearly up above $9.40 and itís poised to reach or surpass the May highs near $14.88. Silver is used in industry and it also plays a role as goldís little sister in times of uncertainty. This could explain why silver has been stronger than gold since 2003 and why itís recently been outperforming gold (see Chart 3D).
Platinum and palladium also remain strong, which backs up the bull market. When all of the precious metals rise together, the bull market is strong and thatís whatís currently happening. So stay invested in these markets and if youíre not in yet, now is a good time to be buying new positions.
Mary Anne & Pamela Aden are well known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts and recommendations on gold, stocks, interest rates and the other major markets. For more information, go to www.adenforecast.com
-- Posted Wednesday, 23 August 2006