Commodities - A Bull Market In Disguise

We could be looking at a once-in-a-lifetime opportunity to get into an established bull market on the cheap. Of course, first you have to agree that there is a bull market — and that might be a little difficult at the moment.

But I’ll show you exactly what I mean, where the opportunity is and how you can get in, if you have the stomach for it.

I’m not talking about the stock market as a whole. Clearly, stocks are in a bear market. A bear market is commonly described as a 20% fall. Let’s check the major markets for bearish symptoms.

The FTSE has fallen 39% since it peaked in October last year. By July it had already fallen the requisite 20% from that peak to qualify as a bear market. Check. The American Dow Jones and the broader S&P 500 have collapsed 36% and 39 % in that time. Check. Japan is down 49%. Check.

The world’s stock markets as measured by the MSCI World index are down by 43% since last October’s peaks — and by 29% in the last two months alone. That’s another undisputed bear market performance.

Whichever way you look at it, we’re in a bear market in shares. And it looks like it’s going to continue, as investors are forced into liquidating positions. This deleveraging of the markets will continue to drag the indices down.

That’s not to say you can’t make money, of course. You can always make money in the markets, if you’re a little smarter than the average investor. You’re just not going to do it by buying the indices — you need to find good quality companies that can beat the bear.

A bull market in disguise

But there’s another market that looks like a bear market at first glance, but which I believe is merely experiencing a short-term correction. In fact, it’s a long-term bull market in disguise.

I believe commodities are in a secular bull market. By that I mean that it’s a long-term bull trend — one that could last up to 25 years. Currently, we’re about seven years into it — and we’re seeing a perfectly normal correction, after prices ran away to the upside. Forced selling of profitable commodities positions to finance the mess in other sectors has dragged the sector down.

The sell-off that we have seen in commodities like oil, gold, silver and so on certainly show the characteristics of a bear market. Oil has fallen some 47% since the $147 peak. Gold and silver have dropped 22% and 51% since their March peaks. These are bear market performances.

But here’s the thing. Secular market trends are made up of multiple sequential primary trends — some bullish, some bearish. As with any market, they zig and they zag.

In a secular bull market the ‘primary’ bear markets are historically shorter and less damaging than the ‘primary’ bull markets were rewarding. Typically, the primary bear market is not deep enough to totally eradicate the inflation adjusted gains of the previous primary bull markets. Similarly, the succeeding bull markets typically make up for the losses of any previous bear markets.

So the recent sell-off in the commodities could just be a bearish zag, caused by forced selling, following the preceding bullish zig. And I believe that the next primary bull market will take out the previous highs and drive the secular bull market on.

Legendary commodities investor, Jim Rogers says: "We have had 8-9 periods of forced liquidation over the past 100-150 years wherein everything was liquidated without regard to fundamentals. This is such a period."

Rogers believes that the current global economic meltdown will make the commodities bull market last longer. It’s currently being hit by the prospects of slowing growth in emerging economies such as China and India. But, this will ultimately affect supply and that in turn will cause prices to move higher.

"The cyclical demand for commodities may slow, but the secular supply will be badly affected so the commodity bull market will last longer and go further in the end," Rogers says.

Our own commodities expert, Garry White, agrees. In his latest research on our Fleet Street Invest website, Garry writes:

"Market conditions are setting the scene for the next leg up of the commodity supercycle. There are three things that are happening today that will guarantee higher prices for commodities in the future, once the current jitters have started to ease."

Garry explains that all base metals prices except copper have fallen close to their cost of production. If prices fall any further, it’s likely that mines will be closed. This will cause supply to tighten and prices will rise. That could kick off the next great run.

To read Garry’s research in full, and discover how you can get in on the next leg-up of the commodities supercycle, follow this link.

Until tomorrow,

Frank Hemsley
For Fleet Street Daily

Selected articles:

In the Eye of the Storm by Tom Bulford

Manraaj Singh on the Boomtown on the Edge of the World.

The Daily Reckoning — The Trillion Dollar Trap

"Thank God for Argentina," said our old friend Doug Casey last night.

On Friday, the US stock market lost another 127 points. Almost all the news is bad. Consumers are slowing down their spending — retail stocks are down about 40% from their high. Even Walmart — where people go when they don’t want to spend much money — is down about 20%.

US factories — those that are left — are going quiet too. Word came out last week that factory output slipped 6% in the third quarter; it’s biggest drop in 17 years.

On Sunday, we went to church here in Buenos Aires to the sound of bagpipes. A church around the corner from our apartment has services in English. Out front was a bagpiper in full dress uniform of the Scottish Highlanders. What was he doing there? We don’t know. We continued on down the street to another church.

"Render unto Caesar that which is Caesar’s," was the key line in yesterday’s service. Our Spanish is poor. But we’d heard the story before, so we knew the plot...

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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