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March 28, 2008

The Mega Commodity Move: Why It's Happening
by Mary Anne and Pamela Aden

The precious metals have been soaring. Gold, silver, platinum, palladium... you name it. If it's a metal, it's been booming. The same is true of other commodities too.

So are commodities the new bubble? Have they replaced the real estate bubble, which replaced the tech stock bubble, as investors move from one bubble to another? It sure looks like it. But the big difference is that this metals and commodities bubble has a lot further to go. Why?

THE PERFECT STORM

Basically, the perfect storm has been gathering and it's going to fuel a mega rise that will likely last for years to come. We've often discussed the most important reasons why but since these markets have been picking up steam, we'll review these basics again.

Most important is China and other growing nations, which are keeping demand and prices super strong. But also important are spending, soaring global money creation, inflation, the falling U.S. dollar and international tensions. But let's take China first...

China power

China's growth has been astounding at over 9% each year for more than 25 years. During that time, China has lifted 300 million people out of poverty and it's quadrupled the average income.

This is the fastest economic growth in recorded world history. Many felt it couldn't last, but year after year it has, and it's going to continue.

Since wages are higher in urban areas, 500 million rural Chinese are expected to move to the cities over the next couple of decades in search of the good life that former migrants have already found. This growing middle class is proudly spending money on homes, cars and other consumer goods.

Retail sales, for instance, recently soared 20% and China has become the world's second largest oil consumer. This huge demand for all things, from food, to oil, gasoline, metals and other commodities has been one of the main factors driving these markets higher.

The Chinese government's top priority is to close the gap between rich and poor. And they want to make a big splash on the world stage as a major power during this year's Olympics. But something more important is also happening.

As Time magazine points out, comparing China to the U.S., China is cramming two important eras into one. The post World War II prosperity that fueled the flight to the suburbs is coinciding with the 19th century Industrial Revolution that lured people from the farms to the cities.

This is powerful stuff. Demand for everything is huge and there's no end in sight. This reinforces that the mega commodity uptrend will continue.

Demand growing

That's especially true combined with another source of growing demand, which is new money looking for good returns. With stocks and real estate down, the metals and commodities have become increasingly attractive, and with good reason.

The metals have gained between 12% and 30% so far this year. Commodities are up between 9% to 26%. These markets have strongly outperformed all other investments. They are also stronger than any currency, and with the U.S. dollar super weak at new record lows, it makes the metals even more attractive.

Supply limited

Then there's the supply factor, which is critical as well. While demand is soaring, supply is limited. It's also consistently threatened by international tension or internal mishaps.

Considering it takes many years to develop new mines, this supply picture is something that's not going to change quickly. The recent electricity shortage in South Africa, for instance, drove many metals prices sharply higher because miners simply couldn't work and supply was therefore disrupted.

Also, don't forget that events in areas rich in natural resources, like the Middle East, Russia, Nigeria, Venezuela and many other places, could push the price of metals, oil and other commodities sharply higher in a heartbeat, depending on what happens in these countries. Basically, world tensions are truly a big wild card.

Spending & money: Out on a limb

A real biggie, however, is spending and money creation. That's the cause of inflation and there's no end in sight here either.

Spending is skyrocketing. The military budget alone will be the biggest since World War II. The baby boomers are now starting to retire and since 20 million of these upcoming retirees don't have enough money to retire on, it's going to balloon spending to far greater levels in the years ahead.

Meanwhile, money is flowing like mad all over the world. Money supply is up 16% in the U.S. but it's even more in other countries... it's soaring 42% in Russia, 21% in India, 18% in China and so on.

And with the whole world worried about a U.S. recession, as well as the domino effects of the subprime mortgage meltdown, which has already tallied up losses of around $200 billion (so far only half of what's expected), the money's going to keep flowing, all in a concerted effort to avoid a recession at all costs.

You see, a recession could turn into a deflation, accompanied by massive bank failures, and that's something no one wants. Sure, all this money is fueling inflation and the commodity boom. And yes, lower interest rates are making the U.S. dollar super unattractive and driving it to new all time record lows, but low rates will help the economy.

The bottom line is that this inflation option is a whole lot better than the deflation option, and that's what the Fed and the world's central banks have chosen to do. They really have no other choice.

Inflation growing

Remember, gold has always been an inflation hedge. With money flowing, oil above $100 and commodity prices soaring, inflation is surging too. It's moving up at the fastest pace in 26 years, which is not surprising when you see the CRB commodity index hitting record highs (see Chart 1). This is also making the precious metals very appealing and it's one of the most important components in this overall big picture (Chart 2). So despite normal ups and downs, the major trends are clearly up, and there's no reason to believe that's going to change.

HAVE ALL COME TOGETHER

That's the perfect storm in a nutshell. All these factors have come together at the same time, and they're extremely bullish for gold, the other metals and commodities. These are the reasons why the metals and commodities markets are rising and why they'll keep rising.

Interestingly, these factors are also coinciding with the 200 year commodity cycle, in which bull market upmoves have averaged between 17-22 years. Currently, we're only seven years into the current bull market, so this too coincides with the fundamentals, reinforcing that these rises still have years to run.

That's why we've continued to stress keeping a large portion of your investments in gold, silver and their shares. No investments have been better over the past few years and we feel strongly that these markets will remain winners.

We wouldn't trade these markets and this month's strong upmove illustrates why. Just plan to stay with the mega upmove for the long haul. Essentially, the storm is getting stronger and that's not when you want to be jumping ship.

Mary Anne and Pamela Aden
Aden Forecast.com

Mary Anne and Pamela Aden are internationally known analysts and editors of The Aden Forecast, a market newsletter providing specific forecasts on gold, gold shares and the other major markets.

Copyright © 2003-2009 Mary Anne & Pamela Aden

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