Don’t Buy Into the Commodities Rally

06/04/2009 11:20 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert thinks commodities have gone way too far given the weakness of the underlying world economy.

Am I the only cautious investor in this speculative frenzy?

I think you have to have your head examined to put new money to work at these levels. The entire gamut of risk-based assets has surged since March with barely any profit-taking or backing and filling.

The CRB Index just posted its best month in 35 years as the dollar continues to soften. What’s truly amazing is that global markets have started to discount a typical v-shaped recovery whereby global economic growth will recover swiftly before the end of the year. This will be a sluggish recovery at best and probably u-shaped like Japan since 1990. 

The US housing market has not bottomed, employment is still crashing to the tune of 600,000 monthly job losses, and consumer prices in the major economies continue to decline. Also, bank lending is still contracting. Just how we’re supposed to record a sustainable economic recovery without bank credit flowing is beyond me.

We are still living amid deflation and credit destruction. The transition from deflation since last summer to inflation is still a few years away—at best. Yes, all of this government printing will result in utter monetary madness eventually, but not now.

And now, a major breakdown is occurring with long-term US interest rates rising sharply, coupled with a marked decline in base metals. This is not the macro foundation for a sustainable rise in commodities.

Gold prices in May gained 9.9% while silver prices rallied 27%—the largest monthly gain since January 1983. The XAU Index, which consists entirely of mining stocks (no physical gold or silver), has now gained an incredible 149% since hitting a four-year low in late October.

The summer has traditionally been a bad time of the year for commodities, including gold, and I doubt this year will be any different, especially following huge gains lately. Too many investors have turned bullish on gold lately and I don’t like the company.

The trigger for the latest bout of speculative buying is the US dollar, which plunged to a six-month low last Friday. The US Dollar Index has now rolled over and has violated important moving averages.

The dollar, however, is massively oversold, and a major correction looms this summer, probably in conjunction with a stock market decline. I am not advocating new gold or silver positions at these overbought levels, [but] encourage you to buy the Power Shares DB Gold Double Short Fund ETN (NYSE: DZZ) as a hedge.

Commodities are now severely overbought. We are not adding or making new purchases in commodities until another correction brings prices back down to earth. The best bets now are reverse commodity hedges like DZZ, PowerShares DB Commodity Short ETN (NYSE: DDP), and PowerShares DB Base Metals Short ETN (NYSE: BOS).

(Editor’s Note: Short ETFs are only for the most risk-tolerant investors and traders, who shouldn’t put in more than they can afford to lose.)

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