Silver and gold are still good bets

published 31 October 2005

Commodities have been a fabulous place to be invested over the last few years. But are they still? The answer, according to the charts, is that longer term the bull market is intact (the CRB index of world commodity prices is still moving inside its three year uptrend), but that there is risk in the shorter term. This index has recently hit a big long-term high. Only in 1980 and during the second oil shock was the CRB higher than it was at the end of March this year. And just a few short years ago, in 2001, the index was at a 25-year low. Such an enormous move is going to need to cool off at some point. That said, there is a wild card in the equation: the oil price. If that keeps rising, the CRB index could soon head for a long-term double top of 338 (+ 25% from current levels).

And there is a chance that this might happen. Oil is at a critical juncture. It stands on the cusp of breaking out of its 20-year trading range. And while the most likely outcome is that the trading range will hold (they more often do than don't), there are also a good few reasons to think that breakout is possible. Recent price rises have been put down to disruptions to Iraqi supplies and a strike in Norway, but even without these political tensions there is no slack. Supply is tight and demand is rising fast as Asia adopt Western consumption habits. Long term, surely the only way for oil is up.

Finally, a word on gold and silver. At Moneyweek, we have long been fans of both, so we are pleased they are rallying again after the reverses of April. In the case of silver, there is no reason why we won't soon see again the heady levels of earlier this year. And as for gold, after the sell off, the price merely returned to the uptrend support line and the bullish story remained untarnished. There is room for caution on the technical side. The 20-year chart (no 4, below) shows that after a similar sharp three-year run up between 1985 and 1987, gold lost momentum. Yet the fundamentals of the gold market are very much playing in favour of a continuation of the current rising trend. Gold tends to move in the opposite direction to the dollar, which is stuck in a firm down trend, and at the same time its safe haven characteristics are still sorely needed.