Commodities and Gold
Actually, the industrial metals have been a bit stronger than anticipated, not only in US$ terms but relative to gold. The below chart of the gold/GYX ratio (the gold price divided by the Industrial Metals Index), for instance, shows that gold is currently near its lows of the past two years relative to the industrial metals. Taking a 2-year view we remain very bullish on gold relative to metals such as copper, nickel, lead, zinc, aluminium and tin, but as outlined in previous commentaries we doubt that gold will start to demonstrate much relative strength until the second half of this year. The reason is that economic growth is likely to remain reasonably firm during the first half of 2005, thus supporting the cyclical metals relative to counter-cyclical gold.
In US$ terms, early this year it looked like major peaks were in the process of being put in place in several of the industrial metals. However, it now looks like we could get a final surge to new highs in metal prices over the coming weeks. Copper, for example, has been consolidating in the $1.40-$1.50 range in a way that points towards a move up to the 1.60s (a weekly chart of copper futures is included below).
In our opinion, what is presently
underway is a final blow-off to the upside in the prices of some
commodities and many commodity-related equities. It's impossible
for us to confidently predict how much further these moves will
go before the inevitable downturn gets underway, although our
guess is that major peaks will be in place before the end of
March. What we can say with confidence is that the decline that
follows the speculative blow-off will take back all gains achieved
during the blow-off stage plus a lot more. For an indication
of what is likely to happen in some other sectors following the
current blow-off take a look at what happened to silver and silver
shares during March-May of 2004.
Much of our work suggests that the CRB Index is very close to its peak for the year, although with agricultural commodities appearing to be in the EARLY stages of an advance there probably won't be substantial weakness in the index until the second half of this year.
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