Commodity Selloff May Mean Opportunity

03/27/2008 12:00 am EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says the current correction in commodities is nasty and it isn’t over, but it will be a great buying opportunity.

It’s getting nasty out there for commodity bulls.

The CRB Index, like all commodity benchmarks, has declined steeply since March 19th, now off more than 12% from its high. And gold stocks have been hammered, down more 20% from their all-time high just a week ago. Oil is falling, the base metals are tanking, and the soft agricultural commodities are in a freefall.

But don’t panic. Commodities suffer corrections regularly and the current attack on raw materials thus far is playing out as predicted. Commodities have been surging relentlessly since last September, blasting to new highs, and a correction was long overdue, especially in the context of a slowing global economy.

This decline is on par with the summer of 2006. Commodities were hammered starting in mid-May of that year and selling persisted right until September. It was ugly. But through that gut-wrenching decline, we stayed the course and even aggressively accumulated new positions. Gold was trading at $581 per ounce at the time and silver at $10.35 per ounce.

Looking back, the summer of 2006 was a great buying opportunity, and it’s the same situation unfolding once more in 2008.

Right now, buying commodities is the equivalent of trying to catch a falling knife. The great news—and it’s really amazing—is that [we] are going to have another phenomenal opportunity to buy quality assets in the commodities complex at bargain-basement prices when this is over.

The Federal Reserve has gone absolutely out of control in its desperate plight to save the financial system from the abyss. The Fed is doing the right thing conducting all sorts of interbank monetary auctions and providing emergency funds to keep credit markets operational—it has to. But the damage being done to the country’s balance sheet and, of course, the dollar, is horrendous.

Interest rates will have to stay low for some time. Unless you think global investors will seek a safe-haven in the dollar over the next few weeks or months—and I certainly don’t—then gold and most other commodities will recover and head to new highs.

Commodities feed on low rates and a weak dollar. That’s exactly what we have now and it’s going to accelerate as the Fed pumps vast amounts of credit to combat deflation in housing, stock prices and most bonds. The Fed needs inflation badly, and it will succeed, eventually.

We are still in a secular bull market for gold. The US financial system is still extremely fragile and the Fed won’t be raising interest rates again for quite a long time. In this environment of financial crises and dollar weakness, gold prices will continue to rally and hit new highs, probably towards the second half of this year.

This is a correction and nothing more. I doubt this correction will drag gold below $800 an ounce. My maximum peak target price for gold remains at least $2,000 an ounce before it’s all over. Silver should fetch at least $75.

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