How commodities confirm the worst

Anyone with doubts about the voracity of the collapsing global economy, only needs to look at the CRB Index, an index of commodities, to see that something truly important and very serious has happened.

Since December last year, a base formed as commodity prices stopped falling. That base has now been violated and unless it recovers quickly, is almost certainly a harbinger of further global economic decline. Of all the charts we look at, for the time being we think this is key.

CRB index

We print again the chart for crude oil. This, unlike the CRB Index, continues to consolidate at its December levels but now has a bias, to our eye, to the downside.

Gold bullion - last 12 months

We think, looking at the chart and understanding the economic conditions, that a break below $32.40 is more likely than a break to the upside above $50. We look, in the model portfolio, to invest in an ETF that benefits from a declining oil price if the low is violated. Such a move for the oil price will also give added support to our macro view.

AMEX gold bugs index

Since two weeks ago, gold has yet again hit $1,000/oz but this time gold mining shares, as illustrated by the Gold Bugs Index, are at a significant discount to the gold price compared to March 2008 when gold last exceeded $1,000/oz.

Crude oil price

The strong gold price is driven by sound fundamental reasons and the lower oil price makes the mining of gold much more profitable, given that energy represents 25% of gold mining costs. Discounted gold mining share prices and a weak oil price equals a great investment opportunity – we think that is an important message and reason to be very optimistic about the future performance of gold mining shares.

There have been a number of news items of particular interest, not least the report that the Russian central bank is to increase its gold holdings. It has said that it wants 10% of its reserves in gold which would be 1,200 tonnes, up from 495 tonnes.

Gold bullion 1985 to date

We believe that gold might have entered its third, most profitable and crucial final bull market stage of euphoria. The one indisputable fact is that the long-term chart for gold gives evidence that gold is a primary bull market that, as yet, is unfinished.    

• This article was written by Full Circle Asset Management, and published in the threesixty Newsletter on 27 February 2009.

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.