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It is no secret that commodities in general have been on a bullish tear for some time. Precious and Base Metals, Crude Oil, Foodstuffs - - all have approached, hit or exceeded all time highs. Deepcaster’s view is that the long-term, multi-year, case for commodities continues to be very bullish. For Crude Oil, for example, consumption has considerably exceeded discoveries for some years now. Even an economic recession is unlikely to entirely derail many current key commodity consumption trends, particularly given the demands from China, India, and the other Asian tigers which are likely to continue to increase, albeit perhaps at a slower rate. Indeed, the world’s population of food and energy consumers continues to grow by some 80 million persons per year. However, in the short-term (i.e. in the next few weeks or very few months), the price prospects for many commodities are indeed bearish, with two, and possibly three, exceptions. The short-term case - - likely over the next few weeks and perhaps the next few months into mid-year 2008 - - is that prospects are for a drop in many commodities prices. Why? First, while the long-term Fundamentals and Technicals for the U.S. Dollar are simply horrible, (as Deepcaster has laid out in considerable detail in earlier Letters and Alerts) in the short-term the Dollar is technically and fundamentally due for a bounce. As we write, the Dollar is just off record lows against the Euro, and that trend of a seemingly ever-strengthening Euro has now reversed. The largest chunk of the USDX (that “market basket” of other key currencies by which the U.S. Dollar’s value is determined) is the Euro. But the European economies are a little better off than the United States’ economy. Europe’s credit crisis is worsening. The Europeans have a problem similar to that of the U.S. If Europe lowers interest rates inflation will skyrocket. If they do not lower rates they face a continuation of the credit freeze-up and a likely recession, and, possibly, depression. A Euro drop should thus be accompanied by a U.S. Dollar bounce. That Dollar bounce would mean that the purchasing power of the Dollar has increased. Therefore, that would be one major force impelling a commodities drop in U.S. Dollar terms. Ceteris Paribus, it will, in that eventuality, take fewer Dollars to buy the same quantity of commodities. Moreover, the CRB Index is primed to enter its normal December - January selling cycle for the grains, foodstuffs, energy, metals, and other commodities. Technically CRB momentum has already turned down, as Crude has dropped below $90. Significantly, it is clear that the U.S. economy is contracting. Real GDP is falling at an annualized negative two percent*. Finally, there is the crucially important matter of The Interventionals. For those unfamiliar with “The Interventionals” there is very substantial evidence that the Fed-led Cartel of Central Bankers** regularly intervenes in many markets including the major commodities, precious metals, and equities markets, for the purpose of managing price. Indeed, recent profitable Deepcaster recommendations displayed at www.deepcaster.com have been facilitated by considering The Interventionals as well as The Fundamentals and Technicals. Crude OilSpecifically, regarding the Crude Oil market, the Bank for International Settlements (the Central Bankers’ Bank) reports over $7 trillion (June, 2007) in OTC (Over-The-Counter - - i.e. NOT exchange traded) Commodities Derivatives contracts. These contracts are available for controlling the price of commodities (Bank for International Settlements: Statistics Derivatives: Table 19). Of course, the key strategic commodity is Crude Oil. Since the largest player in any market makes the market price, and since $7 trillion in commodity derivatives make the Central Bankers Cartel “the largest player” when it chooses to be, one can expect the Crude Oil price to go where The Largest Player takes it. If one charts the dollar-adjusted value of Crude Oil, the rising trend of the past several months is finally turning down, as reflected in the drop from $100 on the NYMEX to just under $90 as we write. Since the dollar-adjusted value of Crude Oil has turned down we can expect Crude Oil to lead all the commodities down with two and possibly three exceptions which we expect will be only somewhat “touched” by the general commodities takedown. By considering the Interventionals, as well as the Fundamentals, we are in a good position to Forecast whether the $88 to $90 range is an interim bottom or not. Precious Metals Many of the foregoing reasons for weakness in Crude Oil prices apply to the Precious Metals as well. A bouncing U.S. Dollar, a U.S. recession*, a worldwide economic slowdown, and, especially, Intervention (see Deepcaster’s November, 2007 Letter at www.deepcaster.com) all should “conspire” to determine Precious Metals prices in the near term. We Forecast two Precious Metals prices to be taken down substantially, and one other one to be relatively unaffected (www.deepcaster.com). There is a great demand for that particular Precious Metal which we expect not to diminish. Today, supplies are tight and getting tighter. Only a deep recession or depression would likely diminish the bullish trend for that key Precious Metal. Foodstuffs and Other Commodities In the short-term, some foodstuffs will suffer price erosion consonant with general commodities weakness. But others are likely to stay strong because of fundamental demand. Reasons certain foodstuffs will continue their bullish runs include: Diminishing supplies will likely work to keep the price and demand of certain commodities up even in a serious recession or depression. Crop shortages in Asia and demand will likely keep certain foodstuffs prices up. Base Metals (e.g. Copper)Base Metals should generally suffer short-term price takedowns with a few specific exceptions. The leading “Base Metal”, Copper, is likely to fall. Copper is known as “Dr. Copper” because of its ability to “diagnose” oncoming economic activity, which today is falling. Besides, Copper has recently made a technically significant “triple top”. Deepcaster would not be “long” Copper now for love or money! Short Run Bear, Long Run BullWith the real U.S. GDP contracting at a negative 2% annual rate*, the overall demand for commodities by the world’s largest economy, the U.S. economy, can be expected to diminish, at least over the next few weeks or very few months. In the long run of course; that is, about one year hence and after, Deepcaster expects the commodities bull to roar ahead as there continues to be increasing demand for a diminishing supply across the board. And we can expect Central Banks to continue to print more paper which will be chasing that diminishing supply of those tangible assets - - commodities. That means continuing commodities price inflation in the mid and long term.
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