The question facing all investors is how to play the inflation and negative real interest rates that the Fed continues to engineer. In that vein, I have spent a good deal of time reviewing long-term price charts for gold, silver, platinum, palladium, copper and oil. Links are here (precious metals, click on historical charts), here and here (copper) and here for more detailed price charts on silver. I also included oil from memory.
The bottom line as I see it is that these varied commodities have tracked each other pretty well over time. Copper is triple its 1980-era peak, gold about double its peak, silver about equal to its peak but is about double its late-1980 peak which was unaffected by the "corner" that sent it to around $50 months earlier (Hunt brothers). Copper is up about 15 times in 50 years; it has lost a good deal of its market due to fiber-optics. Silver is up about 40-50X in that time frame, as is gold.
Oil was in the $2-3/bbl range in 1970 and is up 40-60X from then. Oil is also about 2-2.5X its 1980 peak.
Where are the metals and commodities going?
So long as the Fed is engineering ultra-low interest rates and averting its gaze from the obvious price inflation that we see all around us, especially in that most "core" of human activities called eating, I feel that the underlying trend remains higher. The "cost of carry" is negligible when money on deposit in a bank yields a whole lot of nothing. Will there be sharp declines? Sure.
But when stocks and bonds were 10 years into their bull markets by the early 1990s, the best was yet to come. Dips were buying opportunities.
Watch the Fed's actions. When and if they actually withdraw liquidity, we will see what prices are real and what are pumped up. Given the unwillingness of Congress and the President to seriously bring revenues in line with expenses, I continue to believe that the game plan of the authorities is to inflate the debt away as well as to inflate housing prices upwards so that the banks and homeowners are made whole again in nominal terms. Doing so, or attempting to do so, has "collateral damage" on the dollar. This in turn reflects in elevated trends of prices of real goods that continue to be demanded by people and businesses. I am sticking to essentials or near-essentials. In these difficult economic times, I am leery of fripperies. The metals mentioned above are "core" products to our economy and financial system. Other core commodities include sugar and cotton, which in healthy bull market-type action, have had significant declines recently following huge runs. (I don't know the first thing about trading commodities on futures exchanges, but if I did, I'd probably be looking into buying the dip in those two commodities.)
I am not spending a lot of energy trying to decide which inflation play is "better" than another. So long as the central authorities have all the power they do, I'm just riding the weak dollar policy as carefully and as long as I can in a diversified manner. Metals, energy stocks, strong foreign currencies . . . it's all one trade. It's also getting crowded, but one could have said that about techs in, say, 1997. Don't fight the Fed is a motto I have adopted years ago. It continues to be a good trader's and investor's credo. The Fed wants more inflation; my money says there's more to come.
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