Commodities and Resource Correction Is Not Over Yet

Friday, May 19, 2006
By Benjamin Train

The severe correction in the commodities market this week has been expected for the last several weeks. The severity of this correction is considerable. The depth of it is evident on any chart you may see for gold, silver, copper, zinc, and other metals. The overall Dow, NASDQ and S&P 500 correction shows possible further weakness ahead. Fund activities can have a big impact on market prices. London's leading share index suffered its worst weekly fall since 2002.

Potential instability in the World's foreign exchanges due to instability in political currency and the U.S. dollar, bode well for the long term precious metals and oil sectors. Oil comprises a huge portion of global trade. 86% of global oil trade is denominated in U.S.$ dollars, however that is also under siege, as the new Iran and Russian Oil Bourse and record U.S. trade deficits, create massive potential instability in the U.S. dollar ahead.

The constant struggle between bulls and bears results in trading cycles and technical signals that are trackable through charts of the commodity sector and indexes. The buy signal is marked at the conclusion of selling cycle.

One of Warren Buffett's more enduring phrases is; "they don't ring a bell at the top." referring to an equities market price in the trading cycle". Well, they don't do it at the bottom either.

Today, I witnessed considerable premature buying positions being taken in most all of the precious metal and commodity sectors. By the end of Friday's trading session many of the stocks that went up in early buying, declined before markets closed and in after hours trading.

I believe the early buys, where due to the positions abandoned by experienced traders seeing attractive re-entry prices, and eager new traders in the precious metal sectors. A lot of new money has been attracted to the resource sectors of metals and energy lately, due to record profits and resulting news and analysts advisories and commentary.

"As always, trade the signals and not the analysis. But when the analysis confirms the signals, we have a very high probability of a correction." Those words were crafted by commodities trader; Jackie Chan. I believe that they also apply to buying signals.

When I study charts, I see the bottom based on a series of sessions, high and low prices, and patterns developed from prior cycles. I also consider lunar cycles, seasons and additional market influences.

The Federal Reserve heavily intervened in support of the U.S. Dollar recently after seeing it fall to an 8 year low. That support, and the Fed's report on "inflation", has moved a number of investors to pull their investment dollars out of the market last week, causing a 500 point drop in the stock market.

By raising interest rates, the Fed is trying to stop the exit of foreign investors. By raising interest rates, higher interest rates are paid to investors of U.S. Treasury Bonds/T-Bills, notes and other U.S. assets.

Be assured, that the rest of the countries doing trade with the U.S., are under no illusion. The sheer volume of dollars being borrowed by the U.S., and printed to pay the bill for the U.S. trade deficit, has forced foreign investors to invest in a suspect currency. The dollar has been falling against a number of foreign currencies since the start of the year, but recently this trend has accelerated, pushing the dollar to a one year low against the Euro and an eight month low against the Yen.

Any further liquidation of U.S. assets, would pull the U.S.$ dollar down and cause a heavy outflow of foreign capital. The Fed has heavily intervened in U.S. and foreign exchanges, using tax payer dollars, to defend the exchange rate of the U.S.$dollar, but how much can they raise our U.S. interest rates before the U.S. economy fails? The impact of a steep fall in the dollar would be destabilizing for economies and markets around the world. Many countries set monetary policy relative to the dollar and as the main currency of global commerce, most commodities including oil are priced in dollars.

Please remember that "inflation" is caused by the Fed. The more money they print and distribute, the more inflation we have. The more inflation we have, the less the dollar is worth. This in turn, increases the price we pay for precious metals, fuel, real estate and a cup of coffee. Raising interest rates to stem inflation is an illusion and a bold-faced lie told to the American public.

Is the market ready to turn up in the commodities and resource sectors? We may be very close in some areas and far from close in others. I still see weakness in the weekly $INDU (Dow Jones Industrial Average) ahead. I think Petroleum/oil may pop first this coming week. Supply (vs) demand has a way of driving up prices. There was an explosion reported at the Valero St Charles Refinery (VLO) Saturday night, May 20th.

The National Commodity and Derivatives Exchange Limited (NCDEX) will launch futures contract of nickel cathode, aluminium and zinc ingots on the exchange starting May 22, while Copper futures fell sharply in New York and London Friday, largely on long liquidations that also occurred in other commodities.

Copper fell down 13% from a high the previous week. Observers cited several contributing factors for the copper weakness: recent declines in equities; worries about inflation and thus more U.S. rate hikes; a report of a global copper surplus in the first two months of the year; a rise in London Metal Exchange margins; a weekly increase in Shanghai Futures Exchange inventories. With the primary aluminium price near all time highs, Aluminium moved sharply lower the previous week at the LME as speculators decided the time had come to earn some profits.

It is always prudent to buy stocks closer to the 200 MACD than the 50 MA in the $XAU and $XOI sectors, however, trade the signals and enjoy a prosperous week ahead. And remember that "inflation" gold, silver and oil raise together.