Why I'm Not Buying the Commodities Rally

10/22/2009 11:10 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says commodities have come too far, too fast amid a global economy that remains very weak.

With very few exceptions, governments around the world are spending like never before to boost economic growth and following classic Keynesian policies. Budget deficits are skyrocketing—particularly in the United States and [Great] Britain, where [for] all intents and purposes local banking systems remain insolvent.

As a result, we’ve got a big rebound this year in gross domestic product in most countries—especially those in Asia. Yet I’ve got to believe that the stock market in the US (and elsewhere) has already discounted a great share of this miraculous rebound.

Stocks, speculative bonds, commodities, and foreign currencies are trading like it’s 2006 all over again despite the fact [that] unemployment is still rising, bank credit growth remains elusive and bank earnings [are] hostage to more loan losses in 2010.

But government life-support spending combined with generous International Monetary Fund assistance to the weakest countries will lend to a second-half jolt in economic output this year, and commodities have responded with some big gains since March.

This sugar fix, however, won’t last because ultimately the world needs a vibrant American consumer to buy their goods, and that party is finally over—and for a long time. China is years away from becoming a consumption-based society. We’re in big trouble as commodities investors if we truly think China can continuously grow her economy at 9% a year without a banking crisis, real estate collapse, or eventually, a recession. Credit is still running rampant in China while in short supply everywhere else.

The truth of the matter remains that those nations hurt most by this credit crisis are the same countries that desperately need a competitive currency to stay afloat. By competitive, I mean a weaker currency. This means the US and Britain especially need inflation—and fast.

[Yet] I continue to refrain from making bold commodities recommendations, because the foundations for a sustainable economic recovery are not evident. I’m glued to gold, the mining stocks, and some energy plays.

In every post-World War II economic recovery, bank credit growth has supported a rebound. But that’s not the case now. In the absence of bank credit expansion in the West we’re inevitably faced with a glut of industrial capacity—and China is probably at the heart of the next financial crisis, because she’s pumping out too much supply in a world still drowning in debt and financial de-leveraging.

Commodity Trend Alert remains near-term bearish on most commodities, except gold and silver. The entire sector is heavily overbought. The recovery since March has come too far, too fast. Use any short-term rally in the dollar as another opportunity to accumulate more gold, silver, and the gold stocks. Also, we’re focused on the energy sector on any intermittent price weakness.

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