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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Commodities Bull Breakout!

Believe it or not, one of the most amazing market developments in decades has just transpired!

The venerable CRB Commodities Index, a basket of 17 key commodities, has gloriously broken free from its nearly two-decade-old overhead resistance and is now ready to target its all-time highs of the early 1980s!

This startling development is big, big news on so many levels and should be dominating the front pages and evening news of all the major financial media, yet the fanfare surrounding the CRB's phenomenal breakout has been all but silent. Even with the biggest commodities bull market in two decades fiercely galloping, only a relatively small number of contrarians are even paying attention so far.

Just as tech stocks did not grow wildly popular until the late 1990s when they were almost topping, the overall percentage of all investors and speculators already actively deploying capital in this young commodities bull remains quite small. As always, it's only the contrarians that boldly lead the way, blazing the trail on which the great thundering herd eventually follows.

This week I would like to discuss this thriving commodities bull that is already generating vast wealth for brave contrarians willing to bet where the crowd is not. We'll look at the hugely important CRB breakout from a long-term strategic perspective first, and then zoom in to the current shorter-term tactical viewpoint. As I think you will agree after you digest these charts, we really are being blessed to witness truly extraordinary market events here.

Our first graph, the big-picture strategic one, shows the entire history of the CRB Commodities Index, which is almost 50 years old, in monthly terms. This long-term CRB chart is one of the more amazing price charts I have ever seen, and there is so much information to cover here. For starters, note the dazzling recent CRB breakout to new monthly highs that have not been equaled since 1984. It is sure not too often that we get to witness major multi-decade breakouts!

It is hard to believe, but right now today the venerable CRB Commodities Index is at its third highest peak in its entire half-century history! The index is within a couple percent of its 283.0 reading from March 1984, 20 years ago, and after that level falls only the stunning 334.8 CRB all-time-high from November 1980 will remain. The highest commodity price levels in modern history are only 20% or so away now, a truly breathtaking achievement in an era where paper investments are universally thought to reign supreme.

And indeed, paper is as good of place as any to start analyzing this mammoth chart. It is really best considered as two distinctive charts from totally different epochs fused together. The character of these two different ages is as diametrically opposed as night and day, and is blindingly obvious visually. The welding point at which these two opposing eras are uneasily joined is August 1971, when the US dollar lost its last remaining shred of gold backing.

Prior to August 1971, commodities prices remained stable. In the entire 15 years between the introduction of the flagship CRB index and the disastrous events of August 1971, the whole strategic trading range of the CRB amounted to only 20.5%! Since August 1971, however, commodities prices have been incredibly volatile. In the 33 years or so since, the CRB has carved a gigantic 245.9% long-term strategic trading range.

The Age of Inflationary Instability since 1971 has proved to be a whopping 12x as volatile as the golden Age of Stability preceding 1971! Where commodities were generally stable and predictable prior to those dark days of infamy, now they careen around like a giant roller coaster. August 1971 marked one of the most fundamental and ugly monetary changes in the entire history of the United States of America, and it is reflected in virtually all commodity, currency, and inflation charts straddling this great divide.

Way back in August 1971 the worst president in United States history after the unspeakably anti-American socialist dictator Franklin Roosevelt, Richard Nixon, decided to summarily annihilate the last remaining shred of credibility in the US monetary system for short-term political gain. Nixon and his cronies reneged on the United States' solemn promises to allow foreign governments to trade in their paper US dollars for gold on demand.

In severing the international dollar gold standard, Nixon foolishly hoped to keep inflation in check leading into the 1972 election, but instead he unleashed one of the greatest torrents of inflation that our great Republic has ever witnessed. He willingly destroyed our nation's sound-money currency system and robbed all of its hardworking savers for decades to come in the hopes of short-term political gains. The commodities price charts all reflect this vast sea change in the fundamental nature of the US monetary system.

Before Nixon brazenly turned the US dollar into nothing but pieces of paper monopoly money backed by nothing but faith in Washington, DC, foreign central banks could trade their paper dollars for gold. While it didn't happen often most of the time, the mere threat of redemption exerted a great deal of discipline on the Federal Reserve. If it printed too much paper money and spooked the rest of the world, there would be a run on US gold.

After Nixon's anti-Constitutional gutting of the relatively sound money of the Republic, all restraint on the Federal Reserve evaporated. With absolutely zero gold backing, unlimited numbers of dollars could be printed at will by the Federal Reserve and it could never be held accountable, at least over the short-term. An increase in the money supply is the very definition of inflation, and inflation soared catapulting prices higher. Commodities prices naturally rode this tremendous wave of monetary excess.

The prices of commodities, and of all the goods and services that we need to live, start rising rapidly when monetary growth soars. As relatively more dollars bid on relatively fewer goods and services, the prices of these things are forced to rise. Nixon's disastrous monetary gamble is the primary reason why general prices today are at least an order of magnitude more expensive than they were back in the halcyon 1950s and 1960s.

If you are interested in a far deeper discussion on monetary inflation and prices, you may wish to check out my "Inflation or Deflation? 2" essay from last summer. For the purposes of discussing the long-term commodities scene this week though, just realize that most of the enormous volatility that we have witnessed in the CRB for over three decades now is a direct result of the inflating away of the US money supply with no solid gold anchor left to keep it in check.

Rather than controlling rising prices, the severing of the last remaining vestiges of the gold standard led to the first vertical price rise in general commodities in modern US history. The CRB rocketed up from 96.8 after Nixon's ill-fated political maneuver to 229.1 by the summer of 1974, a massive 137% gain and the largest commodities rally that the CRB has ever witnessed.

After consolidating near a CRB level of 200 for about 4 years in the late 1970s, another massive commodities upleg erupted in which commodities soared another 90% higher to their all-time-record pinnacle of 334.8 in November 1980. These first and second major bull markets in commodities on this chart after the August 1971 debacle are respectively the largest and second largest uplegs ever witnessed in the CRB, very impressive stuff.

Incredibly these very all-time highs are now within striking distance of today's CRB! Once the Great Commodities Bull of the 00's achieves brand new all-time highs above 335 in the years ahead I am sure that the popularity of commodities investing and speculation will balloon dramatically. As the great thundering herd of the mainstream starts to understand the great wisdom the contrarians showed in deploying in commodities early when they remained underappreciated and unloved, commodity popularity will soar.

Since these initial 1970s and early 1980s monetary dislocations spawned by a truly paper fiat dollar backed by nothing but faith in bureaucrats, the CRB index has been meandering in an enormous trading range. In the rest of the 1980s and 1990s, the major CRB cyclical bulls witnessed gains of 24%, 33%, and 28%. Yet, as the chart above reveals, the CRB was in a subtle strategic downtrend, carving a lazy series of lower major highs and lower major lows as time marched on.

For the better part of two decades, the heavy overhead resistance zone rendered above in red vexed the CRB. It was like a deadly graveyard in the sky, deftly killing any cyclical bull market that dared challenge it. Indeed, early last year as commodities ran up on the eve of Washington annexing Iraq, commodities sold off fairly hard as the CRB slammed into its long-term resistance. But, amazingly, the CRB quickly reversed after the war began and launched another daring challenge to try and break out of its multi-decade trading range.

And this time it finally proved successful! The breakout on this long-term chart is readily apparent above, and is enormously important. Suddenly commodities are trading near their third highest peak in CRB history and are within striking distance of new all-time highs. Today's latest CRB cyclical bull, which I believe is really a long-term secular bull for the reasons I articulated several years ago in "The Great Commodities Bull of the 00s" and updated just last month in "Great Commodities Bull 2", is already up over 50% on a monthly basis.

Since the major cyclical bulls in the CRB of the last two decades only ran 24%, 33%, and 28%, today's 50% bull-to-date gain is almost twice as large as the modern average! In addition, today's 50% cyclical bull is the third largest in the CRB's entire half-century history, only behind the monster 137% and 90% bulls in the decade immediately after the dollar gold standard and Constitutional money were unceremoniously tossed in the garbage.

So, I don't think it is hard at all to argue that we are witnessing truly extraordinary and amazing events in the commodities world these days. Right now we are blessed to see the third highest CRB peak in history, we are riding the third largest CRB bull market in history, and this legendary index has finally broken free of its decades-old oppressive resistance. These fantastic developments ought to be headline financial news all across the market landscape!

Armed with the benefit of a long-term strategic perspective, we can zoom in and see how this current commodities bull is progressing. This tactical chart reverts back to our usual daily closing data, along with technical trading tools like the key moving averages and Bollinger Bands. While this chart alone is certainly impressive, when considered within the strategic context just discussed it really takes on a whole new meaning when one realizes that we are relentlessly approaching brand-new uncharted CRB territory here.

I have not been excited enough to use our bull graphic and throw an exclamation point on an essay title since gold broke above its own long-term resistance in December 2002, but darn it I just couldn't resist this week! The highest CRB Commodities Index levels in 20 years are very special and certainly worthy of celebration, especially if you were blessed to be one of the early contrarians who has been prudently riding this beast since it was born.

The giant long-term resistance line that has oppressed and shackled commodities for decades that we discussed above is rendered here as well. At this short-term scale it is really easy to see the sharp correction in the CRB early last year leading up to Washington's annexation of Iraq. Commodities rallied strongly from their late 2001 lows to early 2003, but once they challenged their heavy long-term overhead resistance they crumbled and corrected sharply.

But this time, rather than giving up their ghost and dying as they had done when their past cyclical bulls failed at this graveyard in the sky, commodities rallied at their 200-day moving average. After consolidating for a few months the CRB once again started streaking towards the heavens, this time cutting through the strategic resistance like it was butter. The huge CRB breakout discussed above is also very impressive on this tactical scale.

The lighter red lines highlight the CRB's new bull-market uptrend, which really is incredibly well defined. In daily terms since the secular commodity bottoms of late 2001, the CRB has rallied up by a phenomenal 51.8% in almost two-and-a-half years, which is an impressive bull market by any definition. To me this is even more noteworthy when we consider the composition of the CRB index.

The CRB index contains 17 equally-weighted commodities, each of which influence the headline index. You and I, of course, immediately think about the big commodities like oil and gold when someone mentions commodities. Oil and gold have both achieved outstanding bull markets of their own in recent years, contributing greatly to the new ascent of the CRB.

But, not all 17 of the CRB components have contributed to its magnificent breakout gains. While soybeans and copper have soared for example, orange juice and cocoa have plunged dramatically in the past year or so. Thus all of the exciting fireworks that we have just witnessed in the bull-to-date CRB have arisen from an index that is not even internally unanimous in traveling a bullish trend yet.

This dazzling CRB breakout is even more impressive when you consider that it hasn't yet even started firing on all 17 cylinders at this stage! Imagine how high the CRB will soar when more of its equally-weighted components do decide to cooperate. It is going to be awesome and I fully expect breathtaking new all-time CRB highs to be achieved within the next year or two. I discussed the awesomely bullish fundamental backdrop supporting this accelerating bull last month in "Great Commodities Bull 2".

While the long-term bullish fundamentals for commodities remain as sound as ever, I would not be surprised at all to witness a short-term pullback here. As you can see above, the CRB is not only above the top of its uptrend channel, but it is also challenging its upper Bollinger Band, suggesting it is relatively richly valued in a short-term technical sense. Also, the CRB today is quite extended above its key 200-day moving average, which provides the most solid long-term support in any major bull market.

In addition, some of the strongest of the CRB's core components are about due for their own corrections. Copper, for example, is on the verge of shooting vertical after a parabolic ascent in the past year, a typical warning sign of a sharp correction ahead. Silver, another strong performer recently, is probably due to correct sooner or later here as well. As individual CRB components enter their own corrections, the headline CRB will be pulled down in a normal, healthy bull-market correction of its own.

Such a short-term pullback, if it does indeed materialize, could indeed see the CRB correct back down near its 200dma, currently at 248 or so. On the first long-term chart we discussed above, a 200dma correction would look really good as it would allow the CRB to bounce off its old overhead resistance line from above, effectively turning it into support. Market technicians just love to see old resistance become support and lots of capital would pour back into commodities if this 200dma/long-term-resistance bounce happens.

From an investment and speculation standpoint, the probability of a short-term commodities correction within a long-term commodities bull is tantalizing. Just as last March's 200dma approach by the CRB proved to be a fantastic opportunity to go long most commodities, another 200dma approach of the CRB would likewise be a perfect time to load up.

For investors and speculators who are not active in the futures markets, the best way to play this unfolding commodities bull is to buy stock in quality unhedged companies that produce these rising commodities. As a commodity price rises, generally a commodity-producing company's costs remain stable, so its profits multiply dramatically. Even a modest 20% rise in a commodity's market price can lead to hundreds of percent increases in a great company's operating profits and ultimately stock price!

During the past few years of this Great Commodities Bull, my team and I have been primarily concentrating our research in gold and silver stocks to ride this beast. There are no other commodities like gold and silver that are so adept at capturing the public imagination, and few other commodities are likely to ultimately draw in as much capital before this bull market finally ends in a spectacular bubble years down the road.

We continue to look at other primary producers of other commodities as well, including energy and other metals, but so far in this CRB bull to date no other stocks as a group have come close to performing as well as the gold and silver stocks. I have no doubt that other commodities sectors will also shine at various stages in this Great Commodities Bull, but to this point the legendary gains have largely migrated into the precious-metals producers.

As a matter of fact, I believe that another legendary buying opportunity is rapidly approaching in gold stocks. In the just-published March issue of our acclaimed Zeal Intelligence monthly newsletter, I discussed the convergence of the key technical signs leading towards this coming strong-buy signal in detail. While not quite there yet, we are getting closer every day and an amazing buying opportunity for both investors and speculators looms on the horizon.

In addition, in the March letter we looked at the individual technicals of six elite blue-chip gold and silver stocks that look like the most promising major precious-metals-stock picks to buy for the next major gold upleg. Please subscribe today if you are interested in understanding the promising gold technicals and preparing your own portfolio to ride the next major surge in gold, the king of commodities investments!

The dazzling commodities bull breakout to its third highest peak in CRB history is a strong wake-up call to all contrarians who have been dragging their feet on commodities. While the commodities bull market remains young and probably has a great deal higher to run yet in the years ahead, the greatest profits will still be earned by those who recognize the bull the earliest and deploy their capital accordingly.

While this fantastic multi-decade CRB breakout was denied the headline financial news that it absolutely deserved, future CRB highs, especially when a new all-time record is carved, are not going to be so quiet and stealthy. The Great Commodities Bull of the 00's is alive and well today, and thriving, but it is not getting any younger.

If you needed any more confirmation that this commodities bull is the real deal, the glorious breakout to the third highest CRB peak on the third largest CRB bull market in history ought to be more than enough to convince you.

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