Will Mr. Market present a new all-time high? Should we join the party? We maintain the TSX as the mo...
Stay With the Yellow Metal and Black Gold
03/19/2007 12:00 am EST
Curtis Hesler, editor of Professional Timing Service, thinks the recent declines in gold and oil prices are just temporary and that the commodity bull market is alive and well.
Until the [ratio of the Dow Jones Industrial Average to the price of gold] falls to 5x, the current commodity bull market will continue.
The Dow/gold ratio exceeded 35x before the stock market hit its highs in 2000. It has since been in a long-term decline; and currently, it clocks in at about 18x. The ratio reflects the relative strength between financial (paper) assets represented by the Dow Jones Industrials and the quintessential real (tangible) asset-- gold. When the ratio falls under 5x, it will be time for you to shift from an emphasis on tangibles back to paper assets once again.
Until then, the commodity bull lives. I don't see an end to this for several more years - easily until the end of this decade. Your focus should be on tangible asset investments and, in particular, specific real asset investments that offer the best advantages during a commodity bull market.
This brings us to gold-the quintessential real asset. We expect to see a correction in gold during March. Gold should settle back to about $640, and this correction will give those of you looking to put some new money into the market an opportunity to buy precious metal [stocks].
How far will gold go? I have no doubt that it will double from today's level. That is really a very conservative estimate. [But] you should be prepared for a relatively bumpy, but profitable, ride through 2007. Once the March selling is over and gold recovers, I expect to see selling come in again at the May 2006 high. That will offer stiff resistance, and it will take a little time to overcome $730.
Once gold resumes its rally, the rise will then accelerate; and I think the real move will be during 2008 and 2009 when the truly awesome fireworks will begin. These will be the years when the commodity bubble will begin to surface.
Crude oil is black gold, and it is perhaps the most important commodity on the planet. There is no substitute for crude oil. [Even though] Canadian tar sand production is now about one million barrels a-day, Mexico [still] supplies 20% of US crude imports. Daily output from their largest field, the Cantarell Field, declined by 500,000 barrels a day during 2006. This field has clearly peaked, and it will decline further this year. Thus, half of the great Canadian tar sand "solution" has already been offset by the decline in the Cantarell Field alone.
Bottom line, although we will see more corrections along the way, the energy market has turned higher with the rest of the commodity complex.
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