It’s a difficult time for commodities bulls. Crude oil is off more than 20% from its July peak. Gold is going for about $830 an ounce, way off its Spring highs. And the Reuters/Jefferies CRB Index is down 19% from its June high.

Energy expert Byron King says investors shouldn’t panic over the drop in prices. For a start, August is a notoriously poor month for commodities. It tends to be a month of net selling.

Despite some demand issues caused by the global slowdown, Byron says commodities are in a short-term correction. And that means plenty of great bargains on offer…

This from Bryon:

First, you need to know that August is almost always a tough month (depending on how you look at it) for resource prices and resource stocks. A lot of people take vacations in August, including some folks who are key players in the resource markets. So the market makers are on holiday, as are the markets.

Indeed, no less an authority than Rick Rule was discussing this at the recent Vancouver Investment Symposium. “August is when a lot of things go on sale,” according to Rick. Rick views August as a good time to buy great resource stocks at relative bargains.

Also - at least in U.S. markets - August tends to be a time for net selling. Traditionally, a lot of parents and grandparents sell stocks and redeem mutual funds to come up with tuition payments for private schools and colleges. This insight comes from an old acquaintance of mine who helps to manage the endowment funds of Harvard. He told me that Harvard makes money both ways. Harvard gets paid the tuition. And the endowment fund buys stocks that are relatively cheaper in August.

So even in the face of some dramatic declines of late, my goal is to keep it all in perspective. Don’t panic yourself out of the market just because some things happen in August. This is only one month in the year.

Dollar Strengthening

Let’s look at some other issues that have affected the marketplace. The U.S. dollar has been strengthening in the past month. The dollar has gone from about $1.60 per euro to about $1.50, a gain of about six percent or so. That kind of currency swing in just one month - between two of the world’s major currencies - is evidence of a powerful wave out in the world marketplace.

What kind of wave? Call it sentiment. Call it perception. Or as Groucho Marx once said, “Call it a banana.”

But the bottom line is that people are buying dollars and selling euros. This is based on their beliefs about the future and not much else. Really, it’s not as if just one month is enough time for anything major to occur within the structure of either the U.S. or the European economic spaces.

For example, new industries and labor markets don’t rise and fall in just one month. Tax codes don’t revise within a matter of weeks. Demographic shifts don’t occur in a month. But a month is plenty of time for peoples’ attitudes to change from “sell” to “buy,” and vice versa.

For our purposes in this newsletter, we worry about energy and resources. And in the space of one month, it’s not as if the underlying values of energy and resources are falling. People still need and want oil, corn, copper, etc. (At $113 per barrel of oil, they want less of it, to be sure.)

But in this summer’s monetary phase - driven by sentiment - the dollar is strengthening. So pricing is weakening for energy and resources and their stocks.

But really, how strong is the dollar over the medium to long term? Will the U.S. somehow magically balance its budget? Is there any hint that Congress will change the U.S. tax code to make American industry more competitive?

~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~

When the Gold-to-Silver Ratio Slides into Balance, You Get Rich

The world has about five times more gold than silver. What if silver cost one-fifth the price of gold?

It would skyrocket over 950%!

I’m not saying it will soar that high. I’m not ruling it out, either. At the very least, I’m convinced you’ll see the white metal price rocket above the 300% level very soon. Even the pressure from rising gold prices alone demands it.

Just check out this report, to see how you can make those kinds of profits…

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The dollar is looking good because the alternatives are looking less good. That’s hardly a ringing endorsement for the future. So again, the evidence points to us experiencing a short-term correction.

World Economy Weakening

Then there’s an article in today’s Wall Street Journal titled “World Economy Shows New Strain.” The first paragraph in the lead article on Page 1 states: “The global economy - which had long remained resilient despite U.S. weakness - is now slowing significantly, with Europe offering the latest evidence of trouble.”

Later on, the WSJ article states, “The global weakness marks a sharp reversal of expectations for many corporations and investors, who at the year’s outset had predicted that major economies would remain largely insulated from America’s woes.”

OK, so here we have some evidence that there’s a medium-term “demand” issue at work in the world economy. The U.S. is on the cusp of a recession, what with the broken banking system and chronic monetary mismanagement of the currency. The perception of lower demand going forward is hurting pricing for energy and resource plays.

And euroland, particularly the German economy, is in a recession. This reinforces the worldwide nature of the slowdown. Lower demand hurts current pricing power.

So what’s left? Asia? Will the “China growth story” continue into the future? Actually, I expect China (and the rest of Asia) to grow, but not at rates we’ve become used to seeing in recent years. In particular, I expect to see fewer subsidies for energy use, especially as the world economy adjusts to oil priced over $100 per barrel.

And I expect to see credit tighten in China as the central bank attempts to keep a lid on inflation in the Middle Kingdom. Just a little bit of inflation in China means a whole lot of wealth destruction for Chinese savers and Chinese capital creation.

The Chinese might take some risks that they deem acceptable, like using underage girls on their Olympics gymnastics team. But the Chinese are way too smart to risk igniting long-term inflation in their economy. That would be bad for social harmony, and the Chinese are big on social harmony.

Where Are We Now?

So what’s the bottom line? Where are we now? We’re in the midst of a short-term correction. There are many great buys out there, but I can understand if you want to be cautious and sit on the sidelines and accumulate cash.

If you do buy resources or stocks, just be careful and nibble away. Don’t try to buy everything all at once.

Source: Resources Hit the Dog Days