May has been quite a wild ride and in times of uncertainty, it is very important to take a step back and get a proper perspective on the bigger picture. I recently covered what I consider to be a topping pattern in the US Dollar and now I want to take a look at how it relates to other assets including commodities and stocks.
Major Past Trends
The chart above illustrates the major past trends since mid 2007. We can see an inflationary period leading up to the peak of commodity prices in July of 2008. Soaring energy and food prices driven by over-hyped demand forecasts and further aggravated by record lows in the US Dollar.
Once the asset bubble popped and the financial meltdown kicked in to high gear, we saw a period of sharp deflation marked by the red section of the graph above. While asset prices plunged across the board, only the US Dollar gained as capital flowed out to the sidelines.
Once hyper-inflationary stimulus measures were initiated, the great re-inflation began and a falling US Dollar accelerated a bounce back in commodity and asset prices. This was the beginning of the bull market within the secular bear market context. This is marked by the green section in the above chart.
The US Dollar bottomed in late November 2009, but we still saw a rise in stocks and commodities. Gold had a natural pullback which soon led to new record highs. The commodities index peaked in early 2010 and has not reclaimed it’s highs since. The fact that commodity prices have maintained relative strength despite a the rise in the Dollar means that once the Greenback begins to fall again, commodity prices will likely make new highs. It looks to me that we are right at the beginning of this trend.
Commodities Poised to Bounce
In sync with my expectations that the US Dollar will begin to depreciate, I expect the bounce from current lows to be boosted by the change in currency valuation compared with the Dollar. Energy and food prices will likely rally throughout the summer and could reach their recent highs. While I can’t say for certain how high they could go, I will certainly keep an eye on them and monitor how they hold up.
Gold On a Launch Pad
Gold spent a few of weeks in the spotlight recently when it broke to new record highs. When the SPRD Gold Trust ETF (NYSE:GLD) bottomed at $105 earlier this year, it coincided with a rising US Dollar. The sharp rally that seems to only become more parabolic is occurring despite a rising Dollar. This signals a very strong demand for Gold. Add a declining Dollar to the mix and you have a recipe for multiple new all-time record highs in Gold over the next several months.
How high can it go? Estimates range between $1,300 an ounce to $5,000 an ounce and the range of time frames is just as wide. My first target is $1,300 – $1,400 an ounce (about 10%-16% increase) by the fall.
My logic is simple. The world is inflating away it’s debt, big institutions are loading up as much as they can and the supply is very limited. If the big bad bear market rears it’s ugly head again, you can expect the “Gold Rush” to accelerate considerably.
In summary, equities will need time to heal, the Dollar should begin to fall, commodities should run for the summer and Gold is only getting started. That’s my “bigger picture” in a nutshell. I will be covering some important technical levels to watch out for on shorter time frames, so stay tuned for more.