We continue to receive many questions on what is happening in the markets. First we want to revisit a train of thought that we have been talking about for the past couple of months. We know that in October 2002, the equity markets ended their two year decline and started to make a significant climb. The S&P went from a low of 785 in October 2002, to a high of 1562 in October of 2007. That was a rise of 777 points, which is 1174. Since then, the S&P has moved down, but has not yet reached the 50% re-tracement level. This level is the half way point between the low of October 2002, and the high of October 2007.
At this point in time, we are not convinced that the market has reached its low and feel that there is probably one more decline to come before we see the markets move to the upside. We are looking for the S&P to move back down close to that 50% re-tracement level. We see this happening in the next 6 weeks, around the first week of October, with a low around that 1174 level.
From our technical work, once we get that 10% decline, we expect to see the markets begin to move up from there. Typically, when the markets decline by 25% or more, as they have done this past year, when they reach the end of those declines, they tend to rise by 40%-50% over the next 12-15 months. If this scenario pans out as our technical work shows, there should be some good buying opportunities in the equity markets late September or early October.
As our subscribers are well aware, the commodity sector has been getting hammered the past coupe of months. But we need to keep things in perspective. Gold is down to $792 from its recent peak of $975, which is a drop of $183. But remember that gold is still about $125 above its August 2007 levels a year ago. Oil is down $33 from its high of $147, but is still up $40 from August of 2007.
Now don't get us wrong, these sharp declines make us all a tad nervous, but we need to keep reminding ourselves that especially with the precious metals, these violent price swings are the very common and this will continue in the future. As investors we need to recognize that "when the herd is heading one way, the successful investor is looking for another way. " We had two support levels for gold, the near term level was $850 which held up until last week, and the next level was $790 which is where we are today.
Gold could drop all the way down to $732, which is its next support level, and still be in a bull market. We do not think that this will happen - but it could. Looking at the gold chart, we can see that the Relative Strength Index for gold is at 23.95 - this is very low and indicates that gold is very oversold at this point.
From here, we are looking for gold to make a significant move very soon, up to the $850 - $900 range. But with gold, our technical information indicates that gold's next pivotal date will be in April of 2009. We do not yet know whether this time period will be dramatic turn up or down, but if the trend for gold has been moving down up to April of 2009, then we would be looking for a low of $730, and then a significant move higher. If leading up to April, gold has been moving higher, we would be looking at $1,225 as the top, and then a strong move lower from there.
With oil if we go back to 2005, oil was trading at around the $50 level. Back then we discussed $100 oil. As we got to late 2007, we indeed hit that $100 level and then in early 2008, we saw the recent high of $147. As with all markets, when oil became the number 1 story and everyone was now talking about $200 oil, we became nervous. In our May 18th Flash Report, we said “Oil keeps hitting record highs, but whenever we see this type of hype, we can expect to see a much needed correction. When we see items become front page news, it is time to look for a serious correction. For example, nobody in the general investment market had a clue that wheat and grains were making dramatic gains. But as we started seeing reports in the last month on how expensive wheat was becoming, we saw a major turn in the price of wheat - it fell 45%. The same story goes for rice. It started to rise dramatically, made it to the front page news, and then dropped almost 20%. "
Oil started to drop in late June, early July, but has not yet dropped below that $100 level. At this point, we would expect to see oil make an intermediate move up to the $123 - $126 range. But after that we are looking for the correction in oil prices to continue as we had a huge run up in the oil price as it went from $17 in 2001 all the way to $147 in 2008, and we believe that it will need to flush out more speculators before making its next move higher.
But the question that we keep being asked is "has the big move in commodities from 2001 until this year topped out - is the commodity boom over?" Our answer to that is no! We feel that we are in a secular bull market in commodities and there is a long way to go until it is over. The shortest bull market in commodities lasted over 15 years and the average is almost 20 years. And this bull market has some very powerful driving forces behind it - China, India, Russia and Brazil, to name a few.
These countries and China especially, are changing the world as we know it and they will continue to change the world for the rest of this century. Sure there will be setbacks as we have just experienced these last couple of months, but the major trend will be up for commodities. We believe this because this is not a crisis driven market, but one driven by prosperity, prosperity of developing countries such as Brazil, Russia, China, India, Vietnam and many others. Countries that have seen how well the West has lived and they want a piece of that action. This commodity bull market is being driven by the demand for these resources from hundreds of millions of new consumers who are now owning cars, refrigerators, TVs, cell phones, - all those things we take for granted, they want.
All of this new demand combined with tight supply levels for most of these resources will result in higher commodity prices. Add to this equation the fact that the world reserve currency is the US dollar and that currency has declined over 40% in value over the past 7 years. Sure the dollar is experiencing a short term rally here, but long term it is going down.
Central bankers all over the globe have continued to create money and credit out of thin air - this is inflationary. Even if supply demand declines in the short term, it is still above record levels historically. In July, auto sales in China were at the lowest annual pace in 2 years - but they were still up almost 7% from a year earlier! From January to July, vehicle sales rose 15.79%. In the last three years, vehicle sales in China had grown by 20% or more per year.
We are buyers of gold and silver at these levels. For oil, we are holding off as we noted, we expect oil to rise to the $123 - $126 range, then pull back further to under $100 in the next 6 - 12 months. But in the big picture, say for the next 3 - 5 years, we are expecting sizable increases in most of the commodities, especially, gold, silver, oil and uranium. We continue to buy on corrections.
In our Global Outlook Forecast we said that we were even more bullish for silver than we were for gold. We maintain that thought process today. We feel that silver will outperform most sectors, and could outperform gold by a ratio of 3 or 4. We expect to see silver in the $40 range in the next 3 - 4 years.
For the mining stocks we have seen many of them, especially the junior miners get killed. We are expecting that this will soon be an old story. If we are correct that gold and silver are at or near their lows, and if the general equity markets do indeed turn around in early October, then this combination should propel these mining stocks up significantly. So there might be another month or so of pain here, but we expect to see these mining stocks start to make hay in about 6 weeks.
We know that these past weeks have been hard on everyone as the commodity bull market, especially in gold and silver has seen a dramatic decline. But that is how the bull works. It tries to do everything it can to buck us off. We are not getting knocked off, we are holding on tight and adding to our positions on these corrections. We think that in due time we will be handsomely rewarded for our endurance. Stay tuned!
Martin Straith is the Chief Editor for the TREND letter, an investment newsletter. http://www.thetrendletter.com