Dark Days for Commodities

10/14/2008 11:45 am EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says deflation fears are putting commodities in a free fall, but he's sticking with gold.

Global deflation is now enemy number one. Until July, commodities held firm. But over the last three months they've joined stocks, real estate, and non-Treasury debt securities in the growing liquidity panic of 2008.

Global central banks must stop accelerated deflation now. If they don't, we're going to suffer from a major economic recession and everything, including commodities, stocks, non-Treasury fixed-income securities and real estate, will continue to decline sharply. It's that simple.

Since July the world has violently transitioned from inflation to deflation, or an environment of rapidly declining prices. This is the worst possible time to be heavily long commodities. Until the Federal Reserve and other central banks successfully arrest deflation and start printing like hell to save the financial system—and they will—the trend is bearish. 

The mindless dumping of commodities and natural resource equities is now running rampant again this month as the US dollar's massive rally triggers a wholesale liquidation. The financial crisis is spreading to Europe, while Chinese growth is also slowing. These are dark days for commodities.

At this point we are now in a freefall for the [Reuters/Jeffries] CRB Index. Both short-term and long-term moving averages have been violated, and it looks like this market wants to go lower. Commodities, priced in dollars, are the victims of an ongoing and accelerated liquidity squeeze since July as investors desperately scramble to dump everything to raise cash.

This goes down in the history books as one of the worst corrections or declines for gold stocks this decade. This is also an excellent entry point for investors if history is any guide, suggesting big triple-digit gains lie ahead following big declines. The last such "big" decline occurred back in 2000-2001-one of the best buying points this decade.

Despite the ongoing carnage, we have NOT sold one gold stock and remain long. My forecast remains gold at $2,500 or higher before this bull market is over. You don't sell gold in a panic or at the cusp of the biggest inflation spurt since the early 1970s.

The dollar is mighty strong over the last three months as other economies begin to sink. But this is a relative story, not the beginning of a secular bull market for the dollar. The buck is a debt-plagued currency saddled by a tremendous decline in American financial hegemony since August 2007.

As the markets eventually arrest the forces of deflation and the United States prints a gargantuan amount of debt to finance this bail-out, inflation will make a dramatic comeback. There's death, taxes, and eventually, much higher inflation in this world. To me, gold is the ultimate truth in money. I'm not abandoning gold or the gold stocks. 

At one point in the future when this tidal wave of selling and panic concludes, we'll revisit our long-term investment themes; but for now it's all about reverse-indexing and maintaining exposure to gold and several energy stocks.

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