A major factor in the movement of commodities is the direction of the U.S. dollar. That's because the dollar is inversely related to commodities.
Usually, when the dollar moves downward commodities move upward and vice versa. Commodities are like currencies and represent hedges against the dollar. Therefore, when the dollar is weak, it is very positive for commodities.
A major factor in the commodities bull market in the 2000s, then, was the U.S. Dollar index. The dollar against a basket of currencies fell from a high of around 120 in 2001 to as low as 72 in 2007. That represents a decline of more than 40 percent.
If you are like me and you believe that the massive spending, taxing, and printing of money in the United States is going to cause the dollar to fall further, commodities are a great hedge against this.
The crash of 2008 lead to many commodities falling 40 percent or more from their highs. That commodity decline can be compared to the 1987 decline in stocks. In 1987, stocks were in the midst of a massive bull market, yet the market fell 35 percent in two months, from 2,700 to 1,700 on the Dow.
The Dow then took a few months to bottom and started upward again in 1988. It eventually hit 10,000 — 12 years after the crash.
The Reuters-CRB Index, a commodity price index, bottomed at 180 and rallied to 420 in July 2008. It then fell to 210 during the commodities crash of 2008. The CRB spent a few months bottoming into early 2009 and has turned up to a level of about 245 as I write.
I think, in retrospect, 2009 for commodities will look much like 1987 did for stocks. A sharp, albeit short, drop in a nevertheless long-term bull market for commodities.
If the U.S. dollar is near a breaking point in price, that will add fuel to the fire, allowing commodities to complete this bottoming process and rise in price. Watch the U.S. Dollar Index. If it breaks 78, it should continue lower and that will help commodities rally.
In future articles I will discuss which commodities we see outperforming in the coming years. Remember, some commodities will outperform in the commodities bull market and it is our duty to position ourselves in these commodities.
See David Skarica's Top Gold Stock Picks for 2009 — Click Here
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