In keeping with my last few letters, I would like to continue to focus on the recent bullish activity in the U. S. Dollar alongside the related bearish patterns for commodities in general. As noted last week, we have seen commodity indexes push to the lowest levels in a year, heavily influenced by weaker prices in energies, and of course we in agriculture are painfully aware of the fact that prices for row crops are sitting at the lowest levels in over four years. There is another specific commodity that seems to have been in the news quite a bit that I would like to focus on this week; GOLD.
Those of you who have read my letter for any number of years know that I am not a gold bug. This is not to say that I do not understand that gold has value. It is durable, is widely used in electronics, dentistry and of course in the jewelry industry. For millennia it has been used as a currency or held up as a treasure, but history is littered with stories of those who are blinded by its allure. King Midas, the search for El Dorado and even the Leprechauns at the end of the rainbow are all myths or legends that should warn us of the dangers of lusting after this metal and that even possessing all that our hearts may desire is just as apt to bring us sorrow as joy. I came into the commodity business just ahead of the inflation driven gold rally in 1979 and 1980. I witnessed first hand not only those in single minded pursuit that wanted to possess gold as they has been assured that the financial Armageddon was going to begin at any moment, but then the subsequent collapse and surrender.
As we know, in near classic cyclical fashion we saw gold begin a major advance beginning soon after we entered the new century and raced to new record highs along with almost all other commodities as financial panic engulfed investors once again. This time the gold rush was not because of fears of hyper-inflation and a currency collapse but because of a major recession, dramatically rising level of public debt and…fears of a currency collapse. Granted, I have the advantage of now being able to look back at another bubble bursting, but I remember at that time being almost amused when listening to the purveyors of fear and gold weave elaborate tales of impending disaster. I swear they had taken the identical scripts from 1980 and replaced the names Carter and Volcker with Obama and Bernanke and hyper-inflation with hyper-debt. There is a theory that one of the reasons that the 30-year cycle is so dominant is that you have replaced an entire generation at the decision making level and of course the new never want to listen to the old as we are always that much "smarter" than those who came before. We certainly saw that happen as the most recent gold bubble was growing.
Actually I digressed as to what led me to the topic; this week there were a number of stories in the press about gold extending lower this week in response to waning demand in China and other spots around the world as economies cool off and of course the rise in the Dollar. Gold has not reached all the way back down to the lows posted at the end of 2013, but this was the lowest we have traded since posting highs back in the spring and it does not appear ready to stop just yet. Sounds just like the rest of the commodities markets right now.
The reason that I find this note worthy is you can look at just about any business publication and you will find a bearish story about one commodity or another. I recognize that there are solid fundamental reasons for this and of course they always need something to fill in the space. But for someone that has a natural contrarian bias, when I see everyone headed in one direction, my antenna goes up on the lookout as to why I need to start looking the other way. As a friend of mine used to like to say, "the Masses are Asses and if you run with them you are liable to get kicked."
By no means am I implying that gold or crude oil or the grain markets are at a bottom as there is nothing to indicate that is the case just yet. That said though, I do believe it is likely that we have already witnessed the lion’s share of the downside in a number of these markets and becoming wrapped up in all the bearish talk at this point will blind you to potential signs that the end of the move is coming. Markets always look the most bullish at the top and the most bearish at the bottom. Unfortunately because of that, they always trap a lot of people at each extreme, particularly those the most emotionally attached to the value of the product.
I have written numerous times over the past couple years that commodities were entering a period of realignment as we determine the new trading parameters for post-30-year peak. That said, for several markets I believe we are into the twilight period for the break and now would not appear to be the time to panic on the bear side. As I stated before, I am not saying that I believe we are ready for any immediate turnaround, nor is it an excuse to not make marketing plans and decisions. But if your choice is based solely on a feeling of desperation, chances are the decision will be not be the correct one.