The Best Month in Years for Commodities

10/04/2007 12:00 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says commodities have been on a tear since the Fed cut rates, and he expects the commodities "supercycle" to continue.

September was the best month for commodities in 32 years as wheat, gold, platinum, and crude oil hit nominal records, before adjusting for inflation.

The catalyst for September's major breakout was the Federal Reserve's first interest rate cut in four years on September 18th. The US dollar, already in a bear market since 2001 versus virtually every currency in the world, accelerated its decline the last ten days of the month and now sits at record lows versus the euro [and] at a 31-year low against the Canadian dollar.

Commodities, mostly priced in dollars, typically post significant gains amid extended declines for the world's reserve currency. That's because dollar-priced commodities are worth less when measured vis-á-vis other stronger currencies like the euro. Also, a falling dollar is considered inflationary and commodities are historically a hedge against dollar weakness.   

The Reuters/Jefferies CRB Index, the most diversified commodity benchmark, has recently posted a significant breakout, smashing resistance levels, and [is] now looking to surpass its 2006 record high.

The S&P Goldman Sachs Commodity Index (GSCI), the most heavily energy-weighted resource benchmark, hit new all-time highs on the heels of soaring crude oil prices. In September alone, West Texas intermediate crude gained 13% while the GSCI surged 10.3%. 

Gold prices rallied 10% in September, touching 28-year highs while platinum hit a new record, up 8.6%. Silver, still off from its multi-decade high in April 2006, gained 15% in September.

Every facet of the demand-side equation continues to grow more bullish for gold, including booming exchange-traded-fund purchases, declining global production, rising Indian and Chinese fabrication demand and growing emerging market central bank purchases as major economy central banks wind-down their free-market sales.

Food inflation is now a major concern for consumers and foodstuff manufacturers following incredible rallies this year for wheat and soybeans and, to a lesser extent, corn. With droughts a major problem in countries like Australia and parts of Russia, global wheat supplies hit a 30-year low in 2007, resulting in supply deficits. Wheat prices surged 22% in September-the best-performing commodity.

With the United States now easing monetary policy and the dollar dropping to new lows, prices for raw materials will head into the next phase of the commodity supercycle. And over the next several months, I also expect the European Central Bank to begin cutting interest rates as economic growth continues to falter. Lower interest rates in the industrialized G-7 economies will encourage higher commodities prices and stimulate global demand to new heights.

The majority of natural resource stocks and physical commodities have enjoyed big gains and are now overbought on a near-term basis. I'm not expecting a vicious correction this time around, because the Fed is now lowering interest rates and that's bearish for the dollar. But declines are normal. Until prices come off, we're not chasing this market, regardless of how bullish the price action has become.     

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