Commodities, Slowing Economies= Lower Prices

By: Donald_W_Dony

KEY POINTS:
• Cooling global economies chilling growth prospects for commodity prices until 2010
• Oil remains pinned under $100 over next 18 to 24 months. Downside target revised to $50 to $63 by business-cycle finish
• Downward pressure holds in November for gold, as global funds run to U.S. dollar treasuries; price target lowered
• Natural gas seasonal strength; still waiting for advance. Lowering target

CCI: Dropping target
The Continuous Commodity Index (CCI) is perhaps the best measure of growth for natural-resources prices. Unlike the Commodity Research Bureau (CRB) Index, the CCI is equally weighted and contains a broad range of different markets (e.g., energy, softs, metals, etc.).
Chart 1 illustrates the larger picture, from 1990 to the present. Although the longer-term trend is clearly up, there is also a sharp correction unfolding.

In mid-2007, the CCI began to accelerate upward, to its blowoff peak in mid-2008. This parabolic rise created an equally parabolic decline; all of which lies in a secular bull market.

Although the factors for growth are many and diverse, they distil down to simple components: total supply and demand. Demand is greatly influenced by global economic expansion. And with world economies locked in a contraction phase, is it any wonder that prices are falling? (According to the International Monetary Fund [IMF], global gross domestic product [GDP] is estimated at 4.1% for 2008, compared with 4.8% in 2007. Estimates for 2009 are slipping to just 3 percent.) Stabilization and renewed upward pressure for commodities will only come when global economies start to expand again, plain and simple.

So the overall outlook for the CCI remains basically down, with occasional rallies until 2010. I am lowering my target to 325.

Oil: No relief in contraction phase
This commodity’s trading pattern, over a multi-year period, will reflect the global supply-and-demand dynamics. Those numbers strongly suggest an upward trend for prices.

Shorter term (one to two years), oil’s movement is closely dictated not by long-term fundamentals, but by contracting utilization during this present business cycle (2006 to 2010). Consumption is clearly declining for the world’s largest consumer (the U.S.), and also for China and India, the second- and third-biggest consuming nations. I think that investors should be focusing on this shorter timeframe (one to two years).

Traders are concentrating now on consumption and inventory numbers. With the U.S. moving into its 10th month of a recession, and Europe and Asia now entering restrained growth, demand is expected to remain weak.

Although inventory levels are below the five-year averages, as of October, they are expected to build over the 3rd and 4th quarters, according to the Energy Information Administration (EIA), which produces the official energy statistics from the U.S. government.

The present business cycle (see Chart 2), which I have referred to many times in the last few issues, has approximately another 18 to 24 months of contraction until

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Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2008 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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