Our Short Take on Commodities and the Super Cycle (hahaha)

So what has happened to all of the talk of the commodities super cycle? Investors loved Crude at $150, Copper at $8,000 and Nickel at $45,000, but they don't like them at less than half of peak prices.

We are believers that China, India and Asia will continue to grow. We are not believers that investors should pay any price for any asset, nor that they should chase hot markets.

Commodities are cheap, there is a shift in long-term demand. That being said 1) there is a credit crunch 2) emerging market growth is going to be much less, maybe even half of what the Wall Street strategists and fund managers tell us 3) commodity futures are highly levered vehicles 4) commodity prices trend.

Contrary to the EMH and fundamental analysts most commodities are traded by trend- following CTAs and traders that use technical analysis. Commodity prices do trend. And while fundamentals set the trend in motion, due to the high leverage when a position in commodities moves against a trader, he is more likely to sell. This contrasts with many long-only equity fund managers that buy more and double down (how is that working for you?!) on lower prices. Given the leverage, a small % move in the opposite direction of the underlying commodity can have a very large dollar effect on a commodity portfolio.

Therefore commodities do trend and are highly levered. We advise to never buy them without looking at the charts first. We urge investors to head the advice of Dennis Gartman, to buy that which is going up and short or be on the sidelines as things are going down.

Current commodity prices, which are falling make the fundamental outlook for them even better going forward. Mines will be shut down. At under $800 an ounce, the entire platinum industry is on the brink of collapse. So let the hedge funds liquidate, late the CTAs liquidate. Let world trade slow and let mines be shut down. This will only set up a better return potential going forward.

Short-term the outlook for commodities is fundamentally bad. Long-term it looks much better. They have been beaten down on a slowdown in global trade, forced liquidation, and extreme U.S. dollar strength as of late. Additionally, after the current deflationary environment subsides we believe that inflation will re-emerge in the U.S. and developed economies. The current U.S. monetary base is expanding beyond comprehension, but slowing velocity of money makes it feel as if there were a contraction in the money supply. This will not last forever. More money will be printed and velocity will explode, we should be very good for hard assets. When will this occur? We have no idea and we could be incorrect. We know better than to predict market turns, put yearly closing estimates on the Dow . . . the market has humbled us too many times. We let the markets go where they want to go.

All we can do for our readers is find what we believe are the most attractive investments to be in (or out of for that matter), at the best prices.

So when should we buy? When the chart tells us to. Commodities may be oversold, but in an environment of forced liquidation and a credit crunch, they could become even more oversold.

Never try to catch a falling knife, especially in commodities.