October 10, 2009
Commodities have been moving higher as the dollar continues to weaken and sentiment is increasing for an economic recovery. The precious metals are hitting new highs and seem to be the favorite commodities sector for investors. Moving forward, the key issues are whether the dollar will continue to weaken and whether physical demand for commodities will increase.
I see nothing concrete that will cause a substantial strengthening of the dollar over the next few years. In fact, the dollar could and should move much lower in the years to come. This should support commodities throughout the next several years. There will obviously be rallies within this downtrend, but the overall trend shall be down.
The action in the gold market speaks volumes on the state of the economy. Many of the financial problems have been swept under the rug, but they will eventually resurface. The demise of the dollar and a staggering federal deficit puts gold in the drivers seat for a very logical investment in the years ahead.
Wall Street has been touting an economic recovery and stocks have rallied substantially. All the rhetoric seems to be positive about stocks rallying, but I have yet to see solid increases in demand for commodities. This does have me worried and I fear the rallies in stocks and some commodities are just momentum driven. If we don’t see 3 to 4 percent GDP growth next year, there could be trouble.
Grains: Soybeans had a solid rally last week and may have formed a nice bottom. Many of the grains look like they could have bottomed or made harvest lows. Some weather problems have developed in the last week and the corn crop could come in a bit smaller. Nonetheless, the crops will all be large and if the markets can rally here, the downside may be limited.
