Are We In A Commodity Bubble? 
Has It Burst?

By Dr. Russell McDougal

Just for fun, do a Google search on “commodity bubble.”  This term has practically become official mantra over the past year or so.  Wall Street and mainstream financial players apparently have serious concerns about this particular sector’s longevity.

Recent market activity in the precious metals arena has indeed lent a degree of credibility to this line of thought.  You just witnessed widespread panic and a global liquidity crunch.  Was there a commodity bubble and has it burst?

I’m going to attempt to stop chuckling long enough to get this article written.  What’s so funny, you may ask?

First of all, you have to realize exactly who has been calling the recent commodity move a bubble.  These are largely the same mainstream people who ran up Nasdaq stocks into year 2000, cheerleading all the way and refusing to recognize the historic bubble they were creating.  Neither have they fessed up to it after the fact.

These are the same hypesters who next proceeded to blow up the real estate and consumer spending bubble, also of historic proportions.  Denial was their modus operandi there as well, and thus it remains.

So now we’re somehow to believe they can identify a bubble when they see one?  They couldn’t or wouldn’t recognize two for the ages, even though they were entirely responsible for creating them in the first place.  For the most part, they entirely missed the bull market in metals and natural resources, yet they suddenly become experts on its demise?  Looks like they miserably failed Bubbleology 101, 102, and 103 from this vantage point.  There is no credibility.

Still, it’s always wise to check one’s premises.  Are we indeed on solid footing in continuing to invest in resources?  Are there some dangers dead ahead?  Yes there are, and we need to be fully cognizant of them.

Credit expansions are root causes of bubbles.  Sir Alan Greenspan, though he warned of “irrational exuberance” in 1997, continued to fund the party.  Cheap money has been available to almost everyone for real estate purchases since 2000.  If you can’t get rich by owning stocks that appreciate indefinitely at a 20-percent yearly rate, then surely you can with the ever-appreciating real-estate market.  Right?

Both of these plays were widely prevalent throughout the U.S.  It was almost a national consensus brought to you by those who profited most from it.  Somehow we’re to believe the purchase of commodities has reached this same widespread pinnacle?

It’s not true.  The average investor has yet to find his way to the resource table.  There has been no widespread participation.

Still, there has been a lot of hot money flowing into commodities over the past couple of years.  Some of it just took leave.

The primary export of the United States is some form of paper.  We excel at creating debt and derivatives.  We have no global peers when it comes to financial schemes.  Real assets are the antithesis of these man-made creations and they frequently get spanked accordingly.  The entire global fiat system, with the U.S. dollar still functioning as a central reserve currency, is being strained to the limits as a result of these excesses.

This calls for a continued friendly scenario for real assets!  The underlying problems are worse, not better.

As an aside, my commodity focus is on natural resources alone - metals and the energy complex for the most part.  Neither grains nor meats are part of my repertoire.  The soft commodities will likely play out quite differently than metals or energy over time.

There have clearly been excesses and many are likely still present.  Institutions, “funds,” and their derivative plays are indeed part of the landscape now.  Any time these unregulated financial monstrosities are widespread, you have the potential outcome along the lines of Long Term Capital Management’s meltdown and “workout” in 1998.  It’s not something to ignore.

That being said, there is still much comfort present in selectively participating in metals and energy.  We have seen significant corrections - around 50 percent in copper and 30 percent in oil.  This is considered normal and healthy.  Much of the excess has already been bled off.

The best bull markets climb the proverbial “wall of worry.”  If this worry were not present, you should really be concerned.  Global fundamentals remain in place, which dictates that this is a long-term fundamental play, not a pricked bubble, especially with exploration companies.

Last week’s gold, silver, and resource stock haircut was merely a speed bump, not a market event that will be remembered for any extended period of time.  Hot money, weak hands, traders, and over-leveraged players coughed up their positions.  This is nothing unusual in this sector and it happens with a degree of regularity.  It’s called the buying season in my viewpoint, and it gets me licking my chops.  

This talk of a commodity or resource bubble is simply providing another opportunity for interested players to climb aboard the long-term bull market.  Same with the recent precious metals sell-off.  There are many reasons why I’m staying put with my resource exploration portfolio.  I’ll continue to delve into these reasons in the coming weeks.

Invest Resourcefully,

Rusty

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Market Watch

What Do the Candlesticks Tell You?

By Charles Delvalle

When the market undergoes a massive trend change, predictability goes right out the door.  At such times, a good way to know when the market will reliably turn the other direction is to analyze candlestick charts.

Candlestick charts provide a great feel for the buying and selling demand for a stock, index, or commodity at certain price points.  For a good example of how a candlestick chart can help you time your trades, take a look at the Dow chart below.

After the sell-off on Tuesday, the first thing traders needed to know was whether the fall was over.  Most indicators showed a market that was oversold and ready for some fresh buying.  That’s exactly what happened, but candlestick analysis suggested that this was nothing more than a fools rally.

Notice the long tail above Wednesday’s candle.  This candle indicates that the Dow rose from the 12,200 region to above 12,350, but ended the day around 12,275.  After a 400-point drop, you’d think the market could close at its highs the next day.  Since that never happened, it’s safe to say that the rally that did occur was weak.

The next day, the Dow fell to the 12,050 region, but rallied sharply off its lows and ended the day down about 30 points.  Since the Dow recovered so much and closed near its highs, the intraday low is considered a support line.

On Friday and Monday, the Dow continued to drop, but not much further than Thursday’s candle (the support line).  On Tuesday, the big buying finally began.  This signals a good time to enter long positions.

By knowing how to use candlestick analysis, you would have better timed the market and maximized your profits.  If you want to learn more about candlesticks, check out Japanese Candlestick Charting Techniques by Steve Nison.

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