This One Chart Says It All For Commodities

A quick market update today before I get stuck into commodities.

The Dow Jones was up 225 points, or 1.31%, to close at 17,417 points. As such, we should see a bounce on the Aussie market today.

Given the steep decline this week, a bounce was due last night. However, the Dow closed below the crucial 17,274 major support zone and the 17,200 point support zone on Wednesday. I discussed these targets last week. If we close down tonight below these levels, expect to head towards 16,400 next week.

Caution remains for the next week — we may still see a sharp stock market correction before the bull truly unleashes in mid-February. A weekly close above 17,900 points should indicate that the bull market is back in full flight.

Moving onto commodities….

Why the bullish US dollar calls for strategic investing

The bullish US dollar is a very serious risk for resource punters this year. As resource prices are denominated in US dollars, mathematically they will fall. 

The following graph shows you the inverse relationship between the US dollar index (red line) and commodity prices (blue line) from 2010 to 2014. You can see they’re almost a mirror image of each other.


Source: Allstarcharts.com
Click to enlarge

Since the end of November 2014 — shortly after this chart was printed — the US dollar index is up nearly 10%! Resource prices have been hammered across the board. Unfortunately, this is only the beginning.

Investors are clearly nervous about the future of the world economy. And seeing economic growth coming out of the US, they are flocking towards the US dollar — and not gold — as a safe haven. This is evident as the US dollar index has gone straight up, with little selling resistance.

On the other hand, gold has struggled to find its legs and meaningfully climb above the US$1,300 per ounce resistance level. In my view, the bullish US dollar will soon be too much for gold to continue climbing higher. The hopeful gold bugs won’t know what hit them when gold declines to US$931 per ounce.

Gold stocks will be selling for scraps on the dollar mid-late this year. I’ll discuss this more in the Diggers and Drillers update next week. If you want to see the analysis, click here.

As investors become more fearful about the future, the US dollar will continue to rise.

This is why 2015 should mark the bottom of the trough phase in this multi-year resources bull market. The strong US dollar, crunching resource prices, will catch many resource punters off guard this year. This act will define a true market bottom.

The next bullish phase of the commodities super cycle will start in 2016.

Resource prices will eventually rally with the bullish US dollar next year. That’s when you’ll see the inverse correlation in the above chart begin to break down. Investors will realise that the US dollar is no longer a true safe haven; even the US debt market is at risk of collapsing in a deflationary world.

At this time, the US$160 trillion global debt market will be in disarray and ready to collapse. Keep in mind, at this stage it’s highly likely that we would see the Dow Jones trading above my 26,100 point target (ASX 200: 6,000 points) for this year. This will exceed all mainstream expectations. The issue will then become, where should you put your money?

Punters will start looking towards real assets that are cheap to protect their wealth from governments. This trend will accelerate after the impending European sovereign debt defaults in 2016/17. This is why resources and gold will turn ultra-bullish next year…resurrected from the dead.

You, a wise investor, should see this year as an opportunity year.

Plenty of bargains await you to easily capture more than 100% gains in the years ahead. Pick the best of the lot, and you’ll outperform the pack.

Take advantage now of the crude oil opportunities

A huge opportunity exists for buying quality oil stocks. Things are starting to get interesting…

Saudi Arabia’s King Abdullah died last Friday after 10 years in power.

With the largest oil reserves in the world and increasing oil prices, Saudi Arabia has been able to control the Middle East. This is why you’ve seen Western leaders trying to get into bed with the country’s royalty. For many decades, Saudi Arabia has been the rock of stability in an increasingly unpredictable Arab Middle East.

Unfortunately the luxury of holding this position may change.

Saudi Arabia has become accustomed to higher oil prices. Crude oil represents roughly 89% of Saudi Arabia’s budget. And its budget has indefinitely assumed above US$80 per barrel oil prices. Lower crude oil prices pose a risk to its budget and the stability of the region.

The population of Saudi Arabia is predominantly male, young and unemployed. Typically, Saudi Arabia has been able to suppress climbing social unrest thanks to higher oil prices.

Crude is now trading at roughly US$45 per barrel. And Saudi Arabia has predicted a US$39 billion deficit in 2015. This brings new challenges, including budget changes. The younger people of Saudi Arabia aren’t happy with the intended changes. We’re starting to see rising protests and significant backlash against the new reins of power.

Saudi Arabia’s neighbour, Yemen, has descended into dangerous chaos. It’s likely that you could see this social unrest spread into Saudi Arabia by the middle of 2016.

The Middle East is fast heading towards an all out civil war.

And — surprise — it looks like the US wants to get involved. The US is facing massive deflation and Obama’s policies are destroying what little wealth its middle class has left. A new war is just what the US needs to distract its citizens from this unwelcome reality.  

US boots are heading to the ground of Iraq. And don’t be surprised when you see US soldiers in Syria by 2017. The mission has always been to topple Syria’s Assad. Russia and Iran won’t allow this to happen. The world faces escalating geopolitical conflict at a time when economies are extremely deflationary.

This isn’t good news.

Despite all this, we still face lower oil prices in the short term. I’d expect to see US$42 per barrel shortly. US$42 per barrel represents the long term technical trend line dating back to 2003. My year-end expectation is US$30 per barrel oil.

Geopolitical conflict is on the rise and is set to take off in 2016/17, driving oil prices higher. The resources bull market is set to resume in 2016.

That’s why now is time to prepare for the coming resources boom.

I’ve recommended the best oil stocks on the ASX in Diggers and Drillers. I expect these stocks to be taken over or bounce hard due to their strong fundamentals in the coming months. You can check out my analysis here.

Regards,

Jason Stevenson,
Editor, Diggers and Drillers

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Jason Stevenson is Money Morning’s resource analyst. He believes the best way to make money lies in the resources sector. He says, despite the current environment, there’s always a good resources stock trading under the radar. Jason originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Now he brings that expertise to Money Morning, providing readers with his take on the Aussie resource sector, geopolitics and macro events. Whether its oil and gas, gold or lithium, you’re guaranteed an in-depth analysis of the week’s most important topic. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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