Commodities Base-building into May

By: Donald_W_Dony

KEY POINTS:
• The CRB continues to build a solid foundation for the next advance
• Gold expected to remain near $900 in April as US$ holds above support; $1,200 target
• Oil slowly follows gold’s lead upward; first target is $60

• Natural gas stabilizes near $3.65 support level; waiting for a bounce in April
• Copper’s steady climb indicates a bottom in the business cycle is close
• Base metal prices stick on support levels for fourth month; Asian buying gradually builds
• Agricultural grain prices hold on long-term support lines; the decline is over

The commodities market, in my opinion, represents one of the greatest opportunities for investors over the next few years. I say this for several reasons.

First, most analysts think that this market is dead, and the focus should be centred on big-cap, blue chip stocks. Their argument is that natural resources are a late performer within the business cycle, and, given that the world economy has not even bottomed, why would you buy a market that will only perform well when global growth is rapidly expanding? This classic model of raw materials surfacing during the peak-growth gross domestic product (GDP) periods applies only in times of a stable to strong U.S. dollar. In extended timeframes during which the dollar has been weak (e.g., 1965 to 1980, and 2002 to present), natural resources, and particularly gold and oil, are early to advance.

Second, the vast majority of investors are not looking at the commodity market. Dividend-paying industrials, financials and technology stocks normally garner the spotlight through the media and financial circles, whereas raw materials get a bit of attention only after substantial upward moves. For example, how many investors or analysts were following oil before it reached $100 per barrel? Or gold, before it climbed over $900 per ounce? Very few.

Supply for commodities has remained a challenge for many years. World oil and gas reserves are shrinking, and base-metal exploration has only started to expand after almost two decades (the 1980s and 1990s) of contraction. Any newly discovered energy and metal deposits will take six to eight years to get into production. And, since numerous global projects have been delayed in 2008/09 because of declining commodity prices, the ramping-up of supply to fill world demand for 2010 to 2014 is not a matter of throwing a switch.

Although global demand is clearly soft now, the bottom of the business cycle is expected in early 2010, so can higher demand by too far away?

From a technical perspective, most commodities have shown solid price support since November or December. Gold, which is the leader for the other raw materials, bottomed in October.

Bottom line: The supply/demand balance should favour increasing material prices as the 2010-to-2014 business cycle unfolds and the outlook for global GDP slowly turns positive.

Some upward pressure The much-quoted Commodity Research Bureau (CRB) Index has been pinned in a trading band since December 2008 (see Chart 1 on page 2). This base-building is expected to continue into May.

This is the first page of the April issue. Go to www.technicalspeculator.com and click on member login to download the full 14 page newsletter.

Your comments are always welcomed.

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

COPYRIGHT © 2009 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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