-- Posted Friday, 25 May 2007 | Digg This Article
Your independent Swiss asset manager
THE TIMELESS PRECIOUS METAL FUND
Follow-up No. 7 / May 25, 2007
REUTERS-CRB FUTURES INDEX: RETURN ON ONE CONTRACT ($500 x Index) |
Purchase Date | Contract No. | Purchase Price | Cost (USD) | Price Today | Value Today |
January 19, 2003 | -1- | 241.77 | 120'885.00 | | |
Total | -1- | 241.77 | 120'885.00 | 313.17 | 1562'585.00 |
Profit | | | | | 35’700.00 |
Profit (in %) | | | | | 29% |
OUR LONG-TERM RECOMMENDATION: | | | | GO LONG | |
OUR SHORT-TERM RECOMMENDATION: | | | | GO LONG | |
The twelve-year picture
In September 2005 (see Follow-up No. 5), we noted a pinch of excessive enthusiasm in commodity markets and recommended ”to sell on strength” even though we believed, and still believe, that the secular bull-market still had and has a long way to go.
The market moved higher throughout the remainder of the year and reached a peak of 366 points during the second half of the following year at which point a lengthy correction started to unfold. Whether this correction is now coming to its end is the key question which one has to ask.
On March 23 (see Follow-up No. 6), we noticed that the correction continued to unfold even though we had experienced a sell-off at the end of last year down to 284.61 points, down 22% from the top reached in May of last year. We recommended to defer entering new long-positions, an advice which turned out to be correct as the CRB Index has moved up less than 3%.
So let us examine whether it is now time to buy commodities again or whether we should still wait for lower entry points.
Are Commodity prices really high? Will we have a “New Golden Age”?
The chart shown below under the title “The Global Steel Industry Continues to Power On” shows that according to industry estimates we are at the threshold of a New Golden Age as a result of the China effect. As demand will rise and supply remains stagnant, prices will rise also.
For most, the rationale behind rising commodity prices is simple:
- Demand for basic commodities increases as the world's population (6.6b at present and growing by close to 100 million people each year) strives for improved lifestyles.
- The emergence of China as a super economic power. China will have a huge impact on the world’s commodity markets and is likely to push up commodity prices very considerably.
- Add India with 1.08 billion people.
- Add many other Asian countries like Indonesia (242m), Japan (127m), Philippines (87m), Vietnam (84m), Thailand (65m) South Korea (65m), Malaysia (24m) etc.
- As a consequence, supply cannot meet demand.
- As a consequence, prices will have to go up.
The world population is the total number of human beings alive on the planet Earth at a given time. As of 2007, the world population reached 6.6 billion. In line with population projections, this figure continues to grow at rates that were unprecedented prior to the 20th century, although the rate of increase has almost halved since growth rates reached their peak in 1963.
The world population is expected to reach close to 10 billion by 2050.
The falling US-Dollar
One key factor worth noting is the falling US dollar. If the US dollar continues to weaken, prices will rise to compensate. A trend of rising prices tends to attract more investors and they could push prices higher still. Eventually this process could develop into a classic spiral of rising prices such as occurred during the 1970s.
The United States of America is THE super-power of the world at present. Nevertheless,
- less than 5% of the world’s population lives in the USA.
- The country has huge deficits and debts.
- The country is at war at every corner of the world and it prints as much money they need to pay for it.
- Hurricane Katrina and similar events will cost the U.S.-economy enormous amounts.
As a consequence, the dollar will continue to fall over the long-term.
The medium-term picture
During the summer months of 2005, commodity prices fell through the up-trend line which caused a significant sell-off. After the rebound that followed, a further sell-off ensued which ended lower than the previous one.
At present, we are still faced with two reversal patterns. On one side, the double top around 320 points could signal further downward pressure. On the other hand, the inverse head-and-shoulder reversal pattern, although not yet complete, could herald a resumption of the interrupted up-trend.
It remains to be seen during the weeks to come which side will work out. While it may be wise to wait for the outcome of this battle between “bulls and bears”, it is also evident that the index is pushing against the resistance line around 320 points – and once superseded – we may well see further strength.
The short-term picture
The PMO-Indicator shown below is usually reliable in identifying excellent buying opportunities as well as periods when you are well-advised to be cautious.
The problem with all indicators is that they give you warnings of things that may happen but they do not show when exactly a market will reverse a trend or enter a consolidation.
While be believe that the secular bull-market still has a long way to go, we think that at present, there is no need to rush into the market. Once the Index brakes decisively through the 320 resistance zone, there will still be time to buy at reasonable levels.
How risky is it to buy the CRB-Index?
A lot of people pretend that investing in futures is high risk. They probably confound the investment itself with the fact that you have to put up little margin to buy a contract. If you buy with a high degree of leverage, THIS risk is high.
A diversified portfolio of commodities is most likely less risky than buying ten different stocks on the New York Stock Exchange. If the market goes down, most of your stocks will go down.
If you diversify over energy products, metals, grains etc., your risk is indeed much less.
Investing in the CRB Index or in the Goldman Sachs Commodity Index can be very profitable and an excellent hedge against the falling US-dollar at the same time.
As the Reuters-CRB Index is composed of different products as shown at the beginning, namely energy, industrial metals, precious metals, grains, meats and softs, it could be propitious to analyse individually the products one wishes to buy or sell instead of the Index.
Our recommendation was valid at the time of writing, viz. at
and not necessarily when you happen to read them.
Yours sincerely,
Peter Zihlmann
www.pzim.com
invest@pzim.ch
Tel. +41 44 268 51 10
Mobile +41 79 379 51 57
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Disclaimer: P. ZIHLMANN INVESTMENT MANAGEMENT AG does not accept any liability for loss or damage whatsoever, that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in the trading recommendations or in any accompanying chart analyses, whether communicated by word, or message, typed or spoken by any of its employees.
-- Posted Friday, 25 May 2007 | Digg This Article
