25, 2008 -- History has a way of repeating itself. At times, the "repeat" and history are not separated by much time.
In March for instance, a mere 4 months ago, the CRB index, the most widely followed hard asset index, made up of commodities such as grains, livestock, energy, fiber and tropical markets declined sharply as a major washout across the board took place. The index lost approximately 11 percent and all the, "talking head" experts on the major media outlets were saying the same thing. "Commodities have finally peaked!"
The washout with commodities in March was led to the downside by crude oil. Crude peaked in mid March around the $106 a barrel level and slipped to $96, a decline of about 11 percent. Without exception, the "talking heads" were arguing that the collapse in crude was the reason commodities were peaking and it was more proof the dynamic, historic bull move for hard assets was over. "You can stick a fork in it" they yelled.
Fast forward to early July, only four months later and what do you see and hear? You see the CRB index dropping sharply as commodities across the board are in broad retreat, led by crude oil. Since the early days of the month, the CRB has declined approximately 11 percent while crude oil prices have hit the skids by $24 a barrel, a loss of six percent. And just as it was in March, the "talking heads" in the major media outlets are arguing the collapse in crude and the CRB proves that the long running bull move with hard assets is over. It is done. "You can stick a fork in it" they said once more.
Do not take stock in what the "talking heads have to say." They know not that they know not. I honestly believe the main reason corn prices nearly hit $8 a bushel in late June, early July was because they were constantly discussing the Midwest floods and how it was, "certain" farmers were not going to get the crops planted. During that period, the "talking heads" were touting, promoting and pushing hard the long side of the corn market. Their words lured the public into buying the market. Corn was jawboned to historic highs. Prices did not get there based on supply-demand factors. It was jawboned higher!
Compare the washout in March to the one underway this month. In March, the CRB and crude slipped 11 percent. This month, the CRB has shed 11 percent and crude six percent. If history repeats itself, there should be a bit more coming to the downside for crude with the market bottoming at or near $117 to $120 a barrel. Another $6 a barrel decline for crude from this weeks closing level of $123 a barrel will mean this months washout will be the same as the one seen in March. If it happens, it will be history repeating itself. Again.
In March, the reason the CRB and crude oil prices bottomed was because end users, in need of forward coverage viewed the sell off as a buying opportunity. They waited patiently for prices to decline and once they felt enough was enough on the downside, they stepped up and bought commodities (the CRB) and crude oil. The end result was a new all time historic high for the CRB, crude oil and wide range of other commodities. And during the entire rally from the March-April lows to the highs set in late June and early July, the "talking heads" badmouthed the markets and were 100 percent wrong in doing so. But their words, their jawboning lured the naïve and inexperienced into the markets from the short side. Where they lost money!
There is nothing on the horizon to suggest that the Era of Rising Commodity prices is over. What investors, agricultural producers and speculators have to understand is this; the world is in the early stages of a sea change in what hard assets are worth. Grains, metals, livestock and all tropical markets are not going to go back down to the depressed levels seen two years ago and longer. It is not going to happen. That does not mean prices cannot lose more ground over the short run. But over the long run, a decline back to the levels of a few years ago is simply not going to happen. It will not happen because end users and money funds that only trade the long side of the ledger are waiting patiently for values to bottom.
I am so convinced that the long term outlook for commodities is bright I wish to make three very bold forecasts for next year 2009; December '09 (yes, '09) corn that closed today at $6.20, will not close under $6: the pork complex in '09 will embark on the biggest bull market in history with hog futures hitting $125; gold prices will reach at least $1,200 an ounce. Read those again so you understand perfectly my bias.
Avoid taking to heart what the, "talking heads" have to say. They represent the crowd. And as we know, the crowd is generally wrong. Instead, go to commodityinsite.com and catch the three or more timely broadcasts that come shooting out each and every day. The broadcasts are intended to help you hang on to the money you have. Or, make the pile you have a bit larger.
(The information in this article is the opinion of Commodity Insight's Jerry Welch and subject to change without notice.)