Gold broke through the psychologically important $1,000-an-ounce level for the first time in 18 months yesterday (Tuesday) as the U.S. dollar slumped against key foreign currencies, exacerbating investor fears that loose fiscal and monetary policies will spur inflation as the U.S. economy recovers.

The thinly traded September futures contract for gold traded as $1,006.90 an ounce on the COMEX division of the New York Mercantile Exchange, or NYMEX (Nasdaq: CME), the highest level for a short-term futures contract since March 18, 2008, MarketWatch.com reported. The contract closed the day yesterday at $997.90, up $3, or 0.3% for the trading session.

The London gold fixing – a global benchmark – traded as high as $1,000.75 an ounce yesterday. Its previous high was also on March 18, 2008.

Now that gold has pierced that technical barrier, some analysts are looking for the yellow metal to return to its all-time-record high of $1,033.90 an ounce – a record set last March.

“The higher the price, the higher the volatility, but this market is so concerned with inflation possibilities and dollar weakness that momentum is bringing more investors to the ‘Buy’ side,” George Gero, a precious-metals trader for RBC Capital Markets (NYSE: RY), told MarketWatch.com.

Gold struggled to breach the $1,000 price level last week. Yesterday’s surge corresponded with a drop in the value of the U.S. dollar, which fell to its lowest point versus the euro this year.

“We had a good technical break higher last week and now the weaker dollar is helping gold progress higher,” Saxo Bank senior manager Ole Hansen told Reuters. “We are finally taking out some levels we haven’t seen for a while, especially in the currencies. On that basis, I would assume we will go up to test the highs from last year.”

The dollar fell as low as $1.45 per euro in morning trading yesterday, its weakest level since Dec 18, 2008, according to Bloomberg News. The euro has risen by about 15% against the dollar in the past six months.

Analysts have warned for months that the combination of a soaring budget deficit and expansive monetary policy could weaken the dollar and spur inflation.

The federal budget deficit for 2009 will reach a record $1.6 trillion, more than three times 2008’s record deficit of $455 billion, the White House’s Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) said last month.

From 2010 to 2019, the deficit will balloon to $7.14 trillion, the CBO says, while the White House paints an even uglier, $9 trillion picture for the same period.

Meanwhile, the U.S. Federal Reserve has injected more than $2 trillion into the U.S. financial system and its benchmark lending rate remains at a record low range of 0.00%- 0.25%.

U.S. Federal Reserve Chairman Ben S. Bernanke has provided few clues about exactly what his so-called “exit strategy” will involve, or when it will be implemented. However, the Fed chairman has said that the Federal Funds rate will remain “exceptionally low” for “an extended period” of time, as the U.S. economy trudges toward recovery.

Few analysts believe Bernanke will even start to rein in the Fed’s fiscal stimulus before he’s absolutely certain an economic recovery is underway. Now, with the belief that inflation is hiding around the corner, investors are piling back into gold to hedge against the dollar’s decline.

“In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base,” said Peter Krauth, a Money Morning contributing editor who is also the editor of the Global Resource Alert trading service. “That can only lead to serious inflation, perhaps even hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace.”

Krauth expects that gold prices will shoot even higher in the months and years to come, not just because of the dollar’s devaluation, but because demand is on the rise and global mining output is in decline. Global mine output has decreased at an annual compound rate of 0.8% from 1999 through 2008, according to GFMS Ltd.

In the meantime, demand for the yellow metal has skyrocketed. During the fourth quarter of 2008, for instance, North American and European purchases of gold coins and gold bars rose 811% over the same period the year before. And while demand for jewelry has flattened, new investment vehicles have made purchasing gold much easier for the average investor.

“Exchange-traded funds (ETFs) have been a tremendous catalyst for swelling gold demand,” said Krauth, noting that the SPDR Gold Trust (NYSE: GLD) – the largest physically backed ETF on the planet – is now the sixth-biggest holder of gold bullion in the world.

The SPDR Gold Trust fund held 1,077.63 metric tons of gold totaling more than $34 billion in value as of yesterday, according to its Web site.

“Indeed, the fund’s influence on the market is such that it actually seems as if every year or so it moves up past year another nation in the global rankings of gold-bullion holders,” said Krauth.

Buying the SPDR Gold Shares is one way to get in on the gold rush. The fund’s price fluctuates in concert with the price of gold and it’s more convenient than buying gold bars directly.

For investors who are looking to hedge against the enormous inflationary pressures that are believed to be filtering through the U.S. economy, buying stakes in gold miners is another potential strategy to follow.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Source: Gold Aims to Retest Record Highs After Breaking Through the $1,000 Mark

Oil prices continue to hover around $70 a barrel, and gold is in the mid-$900 range. Meanwhile the CRB Continuous Commodity Price Index has surged to a level 30% above its March low.

Finally, copper, supposedly a barometer of the global economy, went above $6,000 per metric ton – up more than 96% this year.

And while prices for most commodities are still well below last year’s peaks, the price spike is more dangerous than it looks.

Normally, commodities prices zoom at the top of a global inflationary boom, as in 1973, 1980, or last summer. This time, the surge is happening at the bottom of a recession. If it continues, the commodities price resurgence could cut off global recovery before it really gets going.

Commodities prices usually take off at the top of a normal business cycle, as inflation is accelerating. The price rise then causes commodity consumers to feel poorer. This reduces demand and brings on a recession. Then, new production capacity comes on stream after demand has fallen back, causing prices to remain depressed for several years.

That’s what happened in 1973, with the first Organization of Petroleum Exporting Countries (OPEC) oil price rise, and again in 1980, with the second. After 1980, we didn’t see a real commodities price surge until the middle 2000s. That’s because the tech revolution caused consumer demand to move to things like computer chips that used fewer raw materials than traditional products.

Last summer, we had a similar price peak. Given the depth of the current recession, you’d expect commodities prices to stay low for several years, as new production capacity comes on stream. But that hasn’t happened. Instead, prices have rebounded sharply.

There are three possible reasons for this year’s surge.

First, it could be the result of very low interest rates and loose monetary policy. In that case, it will soon lead to a rise in general inflation.

It could also be due to the worldwide fiscal stimulus – in the United States, China, the United Kingdom, India and most other economies. Much of the stimulus - particularly in China – consists of infrastructure spending. Infrastructure development requires lots of steel, copper, cement and other commodities. If that’s the case, the resulting budget deficits are likely to cause bond market problems. That would restrict the supply of funding for capital investment and other private sector needs.

Finally, the surge in commodities prices could be due to continued rapid growth in India and China. The 2.4 billion citizens of those countries, as they get richer, are demanding more goods that require a lot of commodities to produce, like automobiles.

Thus, when India and China grow faster than the rich West, we can expect commodities demand to surge more than global gross domestic product (GDP). If this is the cause, rapid commodities demand will lead to a rise in general inflation and spot commodities prices that will accompany shortages and price spikes. That would have a deflationary effect on output.

We saw this effect in 2008’s third quarter, when real U.S. GDP dropped 2.7%. That drop must have been the effect of $147 oil in July, since the financial crisis did not hit home until the very end of that quarter.

It’s impossible to tell which of these three is really causing the current commodities price surge. We can, however, be sure that it will choke off global recovery if it carries on much longer.

That’s a miserable possibility, especially if it means we also get inflation and higher interest rates. However, as investors we can make some money from the commodities surge.

Here are some ideas:

Powershares DB Base Metals Fund (NYSE: DBB): This exchange-traded fund (ETF) tracks the Deutsche Bank AG (DB) base metals index, allowing you to invest directly in the price movements of non-precious metals. With a market capitalization of $308 million, it is reasonably liquid. Plus, a lot of money has been flowing into it recently.

Vale S.A. (NYSE ADR:VALE): Vale is the world’s largest iron ore producer and a key supplier to China’s exuberant infrastructure growth. Historical P/E of less than 10; will benefit hugely from price run-ups in steel.

iShares Silver Trust (NYSE: SLV): This ETF Invests directly in silver bullion, which has been left behind somewhat in its relationship to gold’s price rise and can be expected to move up as gold does, possibly by a much greater percentage.

Market vectors Gold Miners (NYSE: GDX): Gold miners benefit disproportionately from a rise in the gold price because their production costs are fixed. They are thus a more leveraged way to play it than the metal itself, particularly as surging speculative demand can increase mining companies’ price-to-earnings (P/E) ratios.

Four Ways to Profit From Resurgent Commodities Prices

In fact, when you peruse the news it’s difficult to come to any other conclusion. For instance:

• A number of key earnings reports have been much better than expected, and company executives buttressed those profit figures with positive comments about the next 18 months.
• The trading operations of Goldman Sachs Group Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE: JPM) both just reported record profits.
• U.S. housing prices rose in May for the first time in three years. Initial jobless claims have plunged 15% since their April peak. The Conference Board’s Index of Leading Economic Indicators rose 0.7% in June, its third successive positive reading.
• And just yesterday (Thursday), the Dow Jones Industrial Average topped the 9,200 mark for the first time since November – a potentially highly bullish development for the economy, since stock prices are forward-looking.

But while many experts will look at these developments as an excuse to celebrate the looming rebound to come, I actually see them as a real cause for concern. The reality is that these reports, when viewed in concert with other data, are actually a sign of a re-inflating financial bubble.

This is actually an “Economic Recovery Trap” that – when sprung – will inflict a lot of pain on overly optimistic investors. Now that we’re sufficiently forewarned, we should re-orient our money accordingly.

Doomed by Deficits

It’s not surprising that the U.S. economy has shown signs of strength in recent weeks; it has had huge amounts of money thrown at it.

On the fiscal side, the Obama administration’s May budget plan suggested deficit for the 2009 fiscal year (which ends in September) would reach $1.83 trillion – about 13% of gross domestic product (GDP).

However, subsequently released unemployment figures have shown that the U.S. jobless level reached 9.5% in June, far above the 8.3% rate assumed in the budget. And unemployment is expected to spike further in the second half of the year.

This worsening unemployment situation strongly suggests that the true budget-deficit figures will be even worse than those already announced, a supposition strengthened by the postponement – from mid-July to mid-August – of the normal mid-term budget review. Since U.S. President Barack Obama is currently attempting to steer two difficult and expensive pieces of legislation – the cap-and-trade energy bill and the healthcare-reform bill – through Congress, he does not want unfavorable budget numbers appearing that might be used to persuade wavering legislators to oppose them.

Even at 13% of GDP in fiscal 2009 and 10% of GDP in fiscal 2010, the U.S. federal deficit is far above any previous level reached in peacetime, so it’s likely that if the economy begins to recover these deficits will prove difficult to finance, meaning the budgetary shortfalls will push up long-term interest rates.

That escalation in long-term rates, in turn, could choke off the economic recovery, which to be healthy requires a rebuilding of inventories, extensions of credit to new domestic-and-foreign customers, and a revival of enthusiasm for such large-ticket items as housing and automobiles.

With the yield on 10-year U.S. Treasuries already up from a low of 2.07% in December to a recent level of 3.60%, the dampening effect of rising interest rates may already be becoming apparent. In any case, the deficit is a dark cloud that threatens to obscure the economic outlook.

And that dark deficit cloud will be very difficult to remove.

Know Your (Real) Enemy

The other main problem with today’s economy is the likely resurgence of inflation. Even the U.S. Federal Reserve – which under central bank Chairman Ben S. Bernanke for a long time apparently maintained a fear of deflation above all else – admitted in its last meeting that the likelihood of deflation had receded.

That’s not surprising: In the last six months, core consumer price inflation (excluding food and energy) was a reported 2.4% annually. Although the “headline figure” has been low because of the sharp drop in energy prices the United States economy has experienced since last year, that effect is about to disappear, as energy prices peaked in early July 2008 and fell sharply throughout the fall. Thus, even reported consumer price inflation – on a year-over-year basis – is likely to surge in the months after this one (July).

Moreover, the reported inflation figure may be low. Each month, the U.S. Bureau of Labor Statistics “seasonally adjusts” consumer price statistics to remove normal seasonal patterns from the data. That seasonal adjustment process is thoroughly opaque, and is subject to manipulation. In the early months of 2008, for example, when reported inflation was high, the downward seasonal adjustments were consistently much larger than the average of the decade 1998-2007. The process was then reversed late in the year, when reported inflation was negative, but the upward seasonal adjustments made it less negative. For the year as a whole, “seasonally adjusted” inflation was 0.5% below unadjusted inflation, which shouldn’t happen, except by bizarre rounding effects.

In the first six months of 2009, the negative seasonal adjustments have re-appeared, to the extent that total seasonal adjustments for the six months were minus 1.2%, compared with a 1998-2007 average of minus 0.61%. If the seasonal adjustments are indeed wrong, and should have been at only the average level, then “core” price inflation in the six months to June would have been 3.6% annually.

Not only is that not deflation; it suggests accelerating inflation.

Money Supply Moves

Another reason I wouldn’t be surprised by a reappearance of rapid inflation is the big increases in the money supply we’ve seen over the last year.

According to St. Louis Fed data, the M2 money supply has increased by 8.8% in the last year. The St. Louis Fed’s own Money of Zero Maturity (MZM) – the best measure of the broad U.S. money supply available since the central bank ceased reporting M3 in 2006 – jumped 10.2%. And the overall monetary base zoomed an astounding 92.8%.

In addition, the Federal Reserve has bought $300 billion of government bonds, always an inflationary warning signal since it monetizes the deficit. Furthermore, the Fed and the government together have engaged in rescue, stimulus and guarantee programs totaling an astounding $23.7 trillion, according to Neil Barofsky, inspector general for the government’s Troubled Assets Relief Program (TARP). A “gross” number if ever there was one, that figure is nearly twice overall U.S. GDP.

Let’s face reality: We’re going to be paying this bill for decades to come – almost certainly largely through resurgent inflation. In those circumstances, the recovery in the stock market is based not on reality, but simply on a bubble – an assertion that’s already been vindicated by the extraordinary afore-mentioned profitability of the Goldman Sachs and JPMorgan Chase trading operations, which typically benefit enormously when bubbles are inflating and there is too much money sloshing about.

The near-bankruptcy of CIT Group Inc. (NYSE: CIT), and the losses recorded by the commercial banking sides of Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC), demonstrate that even in a period when short-term rates are exceptionally low, conventional commercial banking is not currently a moneymaker.

Other then Goldman Sachs shares (whose prosperity is likely to be short-lived), it is clear that our investment dollars should be concentrated in two areas:

• Conservatively run overseas economies.
• And inflationary hedges such as gold and silver.

Let’s look at some investment opportunities in each category.

First, we should buy moderately priced shares in countries where “stimulus” has been limited and in which monetary and fiscal policies are close to balance. The two largest such countries are Germany and Brazil, so you should look at the Germany ETF iShares MSCI Germany Index (NYSE: EWG) and the Brazilian iShares MSCI Brazil Index (NYSE: EWZ).

Second, you should make sure that a substantial portion of your assets are in inflation hedges such as gold and silver, either in the metals directly through SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) or through gold mining shares, the exchange-traded fund (ETF) for which is the Market Vectors Gold Miners ETF (NYSE: GDX).

Source: Beware of the Obama Stimulus Trap

That’s a very simple statement, but it’s backed by three powerful points:

• Commodities tend to do well when more popular investments (with retail investors) are doing poorly, and when economic conditions are less than ideal.

• When the typical economic underpinnings are at play, a “Secular Bull Market” for commodities tends to last for about 17 years. And right now, the underpinnings are far from typical – and may even be exemplary, meaning this bull-market run could last a lot longer than the norm.

• And last, but not least, we’re only about nine years into this commodities bull market, meaning that there’s probably a lot more room to run – maybe eight years, and very like even more.

Amazingly, this powerful notion of the “Secular Market Cycle” – despite its tremendous profit potential – is largely unknown to the investment masses, and is rarely discussed by the mainstream business news media. Indeed, it’s so taken for granted that it’s almost a market secret…

If you’re a long-term investor, however, you’ll ultimately realize it’s one of the most lucrative strategies you have in your investing arsenal. And most amazing of all is that it’s easy to understand, easy to deploy and easy to profit from.

Let me explain.

Investing in Commodities & The Secret of the Secular Market Cycle

Why is this commodity investing strategy so special? Well, with a finite time to invest for your retirement, it’s crucial to recognize and understand what we like to refer to as the “Secular Market Cycle,” or “Secular Cycle,” for short.

As the chart shows, a Secular Cycle, from peak to trough, typically lasts about 17 to 20 years on average (the period depicted by the chart ends in 2004, but still perfectly illustrates our concept).

And there are essentially two types of cycles:

• The “Secular Bull Cycle,” during which regular stocks increase in value, and have their Price/Earnings (P/E) ratios (earnings multiples) expand. That means that stocks get more expensive.

• And the “Secular Bear Cycle,” during which stocks tend to experience a decline in both price and valuation, with P/Es that contract. At best, stock prices move sideways over an extended period, but still see their P/E multiples shrink, since corporate earnings are growing at a time when stock prices are stagnant.

For investors, one key problem is that an overall “Secular Cycle,” from trough to peak and back to trough, can take 35 years. That’s a big chunk of a person’s wage-earning years, meaning there’s little room for missteps.

Now, there’s no point in fighting a secular market trend – not if you want your investments to grow.

So it’s essential to determine where we are in the cycle, because that will dictate expected returns over the following decade or two. And since most people only spend about 40 years of their lives investing for retirement, not knowing about the “Secular Cycle” – much less where we are right now in the cycle – leads to guesswork, mistakes and losses, instead of the clear planning that will generate the best investment decisions and, ultimately, the biggest profits.

The last commodity cycle ended around 1980. Essentially, a prolonged period of high commodity prices encouraged producers to over-develop their resources. Demand never fell off. Instead, there was a massive oversupply, and the commodities party eventually ended. Prices got pushed off a cliff, so the entire sector became lean in a hurry as profit margins imploded.

We now know how long a typical Secular Bull or Bear market will last years. We also know that the last Secular Commodity Bull was launched roughly around 2000. That allows us to conclude that we’ve easily got between eight and 11 years to go before supply catches up with the burgeoning global demand that we’re seeing right now.

Investing in Commodities – Profit Plays to Consider Now

With class over, it’s time to put your newfound insights to work, searching out ways to earn the outsized profits that will be available from the Secular Bull Market for investing in commodities.

If you prefer individual stocks, you have to get to know BHP Billiton Ltd. ADR (NYSE:BHP). This $140 billion resources behemoth is the largest diversified mining company on earth. With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack. With a current P/E of 11.66, the stock isn’t bargain-basement cheap, but it still represents a good value. Besides, this is a stock that you’ll want to hold all the way to the very end of the Secular Cycle.

Exchange-traded funds (ETFs) and exchange-traded notes (ETNs), on the other hand, provide investors with more direct exposure to commodity prices, as opposed to exposure to the stocks of the commodity-producing companies.

Finally, you’d be wise to get some gold exposure, too – gold miners can also be an excellent hedge against inflationary pressures.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold. GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

In the next couple of years, as U.S. and overseas economies recover, commodities producers will pay the price for recent major cuts in production, development and exploration – discovering it will be very tough to boost output even as global demand soars.

Shrewd investors will reap the benefit of those decisions: Those shortages will persist, providing quite a tailwind for soaring prices.

Just make sure that your sails are fully deployed.

The bottom line: As you go about rebalancing your portfolio – or continue rebuilding it as a result of the financial-crisis carnage – make sure to include room for a solid natural resources allocation.

Source: Investing in Commodities: How to Buy Gold During Secular Market Cycles

After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world’s largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar.

Since that time, the global economic outlook – especially beyond U.S. borders – has improved, and gold prices have stabilized.

The next step – many gold bulls say – is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce – down substantially from early 2008 when prices hit a record-high $1033.90, but significantly higher than the $712.30 an ounce it was trading at in mid-November.

Then, when talk of inflation resurfaced in February, and later in April, prices surged well over $900 an ounce, again testing the $1,000 level. Gold prices hit $983 in early June – a 38% jump from their November low.

Gold prices have since lost some of that momentum, dropping back down to $940 an ounce, but many analysts believe this is where gold will find support before eventually shooting back to $1,000 – and possibly even higher – by the end of the year.

There are many reasons to believe that gold is poised for such a strong showing: Supply of newly mined gold is dwindling, fresh discoveries of deposits are on the wane, and demand has remained strong.

But the biggest reason analysts believe gold will rebound to its 2008 apex is that the medium and long-term outlook for dollar is rapidly darkening.

Government Support for Gold

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that’s spiraling out of control, the dollar is extremely vulnerable.

The Federal Reserve has lowered its benchmark Federal Funds rate to a range 0%-0.25% and has said it will remain there for “an extended period.”

The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds.

“In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base,” said Money Morning Contributing Editor Peter Krauth. “That can only lead to serious inflation, perhapseven hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace.”

In addition to the Fed’s action, the United States’ spiraling debt poses a significant threat to the dollar’s value, as well.

Federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to theCongressional Budget Office (CBO).

The CBO projects the U.S. budget shortfall will reach at least $1.85 trillion – equivalent to 13% of the nation’s gross domestic product (GDP), a level not seen since World War II – in fiscal 2009. And if the economy doesn’t rebound soon, that number will very likely top $2 trillion by the end of September.

The CBO anticipates the deficit will shrink to about $1.4 trillion in fiscal 2010 and $1 trillion in fiscal 2011, if the economy continues to stagnate, there is a good chance that those budget shortfalls will be even greater than the fiscal 2009 deficit.

Some of U.S. President Barack Obama’s advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be in the cards.

Laura Tyson, former chair of the U.S. President’s Council of Economic Advisers during the Clinton administration and current advisor to President Obama, said July 6 that the $787 billion stimulus passed in February was “a bit too small,” and that more may be required.

But if another stimulus is needed, how exactly does Washington plan on financing it?

While the government has continued to find buyers for its Treasuries, the question being asked by analysts is at what point will investors start to balk at continuing to finance the American expenditures.

China – the largest holder of U.S. debt – is already losing its appetite for U.S. Treasuries. In fact, the world’s fastest growing economy has already admitted to stocking up on gold to hedge against the dwindling value of its dollar holdings.

With the Dollar Diving, China Turns to Gold

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March.  That stands in stark contrast to the Treasury market of two years ago, when China’s demand for U.S. securities actually exceeded the United States’ own borrowing needs.

Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes – those that mature in a year or less – while at the same time unwinding its position in Treasuries with longer maturities.

“They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JPMorgan & Co. (NYSE:JPM) analyst Frank Gong told The Associated Press. “Inside China, there has been a lot of debate about whether they should continue to buy Treasuries.”
As Money Morningreported in June, Treasury Secretary Timothy F. Geithner traveled to Chinato reassure the nation about the value of its holdings. But not everyone was convinced.

“I worry about details,” said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Dailynewspaper. “We will be watching you very carefully.”

Prior to Geithner’s visit, Yu told Bloomberg News that he was hopeful for details on the U.S. plan to support the dollar. He also warned that despite its sizeable commitment to U.S. debt, China has other options.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds,’” said Yu. “The euro is an alternative. And there are lots of raw materials we can still buy.”

One such raw material is gold. China recently announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years.

“Gold is shifting back from a sovereign reserve asset central banks were inclined to underplay to one of growing, strategic interest,” said Trevor Keeley, global head of sovereign client services at the Anglo-Swiss bank UBS AG (NYSE: UBS). “This shift is logical; gold remains the world’s primary financial asset that is no one’s liability.”

And China’s not the only one loading up on the yellow metal.

Whether it’s through exchange traded funds (ETFs), or acquiring actual gold bullion, investor demand for gold continues to soar.

Individuals’ bullion purchases almost doubled last year to 862 metric tons, The Wall Street Journal reported. And while gold buying by investors has fallen from its 2008 peak, the volume still remains historically high. The 130 metric tons of gold purchased in the first quarter of 2009 is 50% higher than this decade’s average quarterly volume.

Of course, bullion isn’t the most practical way to get in on gold’s pending surge.

How to Stock Up on Gold

One way to stock up is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE:GLD). Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion.

The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

Buying stakes in gold miners is an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index(HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Source: With Inflation on the Horizon, Gold Prices are Ready to Rally

There’s never been a better time to invest in commodities. That’s a very simple statement, but it’s backed by three powerful points:

• Commodities tend to do well when more-popular investments (with retail investors) are doing poorly, and when economic conditions are less than ideal.
• When the typical economic underpinnings are at play, a “Secular Bull Market” for commodities tends to last for about 17 years. And right now, the underpinnings are far from typical – and may even be exemplary, meaning this bull-market run could last a lot longer than the norm.
• And last, but not least, we’re only about nine years into this commodities bull market, meaning there’s probably a lot more room to run – probably eight years, and very like even more.

Amazingly, this powerful notion of the “Secular Market Cycle” – despite its tremendous profit potential – is largely unknown to the investment masses, and is rarely discussed by the mainstream business news media. Indeed, it’s so taken for granted that it almost a market secret.

If you’re a long-term investor, however, you’ll ultimately realize it’s one of the most lucrative strategies you have in your investing arsenal. And most amazing of all is that it’s easy to understand, easy to deploy, and easy to profit from.

Let me explain.

The Secret of the Secular Market Cycle

Why is it so special?  Well, with a finite time to invest for your retirement, it’s crucial to recognize and understand what we like to refer to as the “Secular Market Cycle,” or “Secular Cycle,” for short.

As the chart shows, a Secular Cycle, from peak to trough, typically lasts about 17-20 years on average (the period depicted by the chart ends in 2004, but still perfectly illustrates our concept). And there are essentially two types of cycles:

• The “Secular Bull Cycle,” during which regular stocks increase in value, and have their Price/Earnings (P/E) ratios (earnings multiples) expand. That means that stocks get more expensive.
• And the “Secular Bear Cycle,” during which stocks tend to experience a decline in both price and valuation, with P/Es that contract. At best, stock prices move sideways over an extended period, but still see their P/E multiples shrink, since corporate earnings are growing at a time when stock prices are stagnant.

For investors, one key problem is that an overall “Secular Cycle,” from trough to peak, and back to trough, can take 35 years. That’s a big chunk of a person’s wage-earning years, meaning there’s little room for missteps.

Now, there’s no point in fighting a secular market trend – not if you want your investments to grow.

So it’s essential to determine where we are in the cycle, because that will dictate expected returns over the following decade or two.  And since most people only spend about 40 years of their lives investing for retirement, not knowing about the “Secular Cycle” – much less where we are right now in the cycle – leads to guesswork, mistakes and losses, instead of the clear planning that will generate the best investment decisions and, ultimately, the biggest profits.

But in order to see where we are, we need to figure out where we’ve been.  To do that, let’s take a look at a very-long-term chart of the stock market in order to study the historic market trends. Then we’ll look at some other key factors – such as the value of the U.S dollar – to confirm our analysis. This is a process few investors take the time to work through.

Where are we right now?  Well, since about 2000, we’ve clearly entered a Secular Bear Market for general stocks.

All too often, investors read such a statement and conclude that its “game over” for portfolio profits. And that’s just not the case.

There’s an old market adage that says “there’s always a bull market somewhere.” That’s true even today, in the midst of the worst financial crisis since the Great Depression. Even if there’s a Secular Bear Market for stocks, it’s very likely that you’ll find a Secular Bull Market forcommodities. So all you really need to do is to focus your investing efforts on the hard-asset sectors.

The Makings of a Secular Commodity Cycle

The last commodity cycle ended around 1980.  Essentially, a prolonged period of high commodity prices encouraged producers to over-develop their resources.  Demand never fell off.  Instead, there was a massive oversupply, and the commodities party eventually ended.  Prices got pushed off a cliff, so the entire sector became lean in a hurry as profit margins imploded.

As you’ve probably guessed, exploration soon ground to a halt.  And little or no money was invested to expand production.  Over the next two decades, investors rejected hard assets.

Over time, known resource reserves were continuously plundered, and finally gave out about nine years ago. At about the same time, the Four Asian Tigers of Korea, Taiwan, Hong Kong and Singapore were already building a gargantuan appetite, and China’s big growth spurt was gaining momentum and growing in magnitude.

The situation has only gotten worse, with global commodities demand continuing to advance – even in the face of sapped inventories.

The Three Catalysts for Major Commodity Profits

We now know that a typical Secular Bull or Bear market will last 17-20 years.  We also now know that the last Secular Commodity Bull was launched roughly around 2000.  That allows us to conclude that we’ve easily got between eight and 11 years to go before supply catches up with the burgeoning global demand that we’re seeing right now.

Yet according to such renowned market experts as author and investing icon Jim Rogers, a number of “wild cards” are in place this time around, meaning this bull market in commodities may have a lot more room to run than its more-typical predecessors. Three factors in particular are extremely bullish for commodities investors:

• Global Infrastructure Spending: The Organization for Economic Cooperation and Development (OECD) last year estimated that worldwide investments in power-generation, water and transportation infrastructure projects would exceed $40 trillion by 2030 – and that was before countries around the world enactedhundreds of billions of dollars in stimulus-spending programs.

• Improving Worldwide Living Standards: About half the world’s 6.7 billion inhabitants are simultaneously pushing to improve their living standards, a fact that by itself stands to create a commodities demand shock never before seen – enough by itself, in fact, to extend the secular commodities bull by five additional years.

• Modernization Efforts in Major Markets: The modernization initiatives in China, India, Brazil, Eastern Europe and other portions of Asia are extremely bullish for commodities prices.

So if you’re looking for a place to stash your cash for the next 12-15 years, look no further: Commodities are the key profit play to make.

Two Arguments Against Low Current Prices

Unless you’re Rip Van Winkle, or had taken up residence in Biosphere 2, you know that the global financial markets suffered through a panic sell-off, and that we’re mired in one of the worst economic downturns in decades.

We also know that many investors sought refuge in U.S. Treasury securities. In order to buy Treasuries, investors throughout the world first bought U.S. dollars, driving up their value in relation to virtually every other major currency. That anomalous and unsustainable U.S. dollar spike hurt commodities, as they are all priced in terms of dollars.

The fear of a deep worldwide recession – or perhaps even a depression – served to temporarily frighten investors out of commodity plays, since the prevailing wisdom was that the global malaise would cause demand for natural resources to plunge. That, too, dampened commodity prices.

But investors who right now fear commodity plays are looking at this from the wrong vantage point: Instead of representing a dangerous point, the situation now at hand is nothing less than an extraordinary opportunity to either make their first foray into commodities, or to add to existing positions during periods of exceptional weakness.

What investors need to understand is that – in the last seven months or so – they have been witness to an impressively quick and coordinated adjustment on the part of commodity producers.  No time was wasted to pull the plug on unprofitable production, suspend near-term new production, or slash capital spending or investments in all forms of exploration.

Right now, most commodities producers are operating with little or no spare capacity. The fat’s been trimmed, and prices are down a third from this time last year.

It’s a situation that just can’t last – for two very simple reasons:

• First, world demand can’t be reversed on a dime. At least half the world continues to move forward with modernization initiatives. Massive infrastructure efforts continue unabated. And governments from both developed and developing nations are ensuring that this infrastructure-modernization train doesn’t get derailed.

• Second, central governments have recently put on a show of unprecedented fiscal cooperation, unveiling colossal bailout and spending plans. The United States ($787 billion) and China ($586 billion) alone have unveiled stimulus packages worth a combined $1.37 trillion. The addition of all that newly printed money means there are even more dollars chasing a still-fixed quantity of goods. And that can lead to only one outcome: A big increase in commodities prices.

We’ve become used to seeing prices increase. Price increases are merely a fact of life.  That’s why we see pay raises each year; we’re trying to compensate for the prices that are rising all around us.

But the magnitude of recent money-supply increases dwarfs the benign, garden-variety annual price increases of 3% to 6% that we’ve grown used to seeing. In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base. That can only lead to serious inflation, perhaps even hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace. Over time, in turn, this erosion in the value of the dollar will lead to a big increase in the prices of many goods, particularly commodities imported from abroad.

That’s yet another reason why investors must consider resources of all kinds.

Profit Plays to Consider Now

With class now over, it’s time to put your newfound insights to work, searching out ways to earn the outsized profits that will be available from the Secular Bull Market in commodities.

If you want an automatically diversified approach, check out the various resource sector mutual funds available to you.  That can be a great starting point.  Make sure to look at each fund’s individual holdings, which will give you a feel for that fund’s focus, and that will also help you get more familiar with the individual companies and what they do.

If you prefer individual stocks, you have to get to know BHP Billiton Ltd. (NYSE ADR: BHP).  This $140 billion resources behemoth is the largest diversified mining company on earth.  With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack.  With a current P/E of 11.66, the stock isn’t bargain basement cheap, but it still represents a good value. Besides, this is a stock that you’ll want to hold all the way to the very end of the
Secular Cycle.

Exchange-traded funds (ETFs) and exchange-traded notes (ETNs), on the other hand, provide investors with a more-direct exposure to commodity prices, as opposed to exposure to the stocks of the commodity-producing companies.

The broadest exposure you can get is probably through the ELEMENTS Rogers International Commodity Index Total Return ETN (NYSE: RJI).  RJI, based on the index built by the investing-guru Rogers, himself, is comprised of 34.9% agriculture, 21.1% metals, and 44% energy.  Another viable option is the PowerShares DB Commodity Index Fund (NYSE: DBC).  While less diversified – with 22.5% agriculture, 22.5% metals, and 55% energy – it boasts large trading volume.

You can also get exposure through some of the ETFs that focus individually on agriculture, coal, nuclear power, and steel-related companies.  Van Eck’s Market Vectors’ suite of ETFs – such as its Market Vectors Agribusiness ETF (NYSE: MOO) – is a great place to start.

Finally, you’d be wise to get some gold exposure too.  Gold miners could be an excellent hedge against the enormous inflationary pressures thatMoney Morning has repeatedly warned investors to expect. In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold.  GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

The bottom line: As you go about rebalancing your portfolio – or continue rebuilding it as a result of the financial-crisis carnage – make sure to include room for a solid natural resources allocation.

In the next couple of years, as U.S. and overseas economies recover, commodities producers will pay the price for recent major cuts in production, development and exploration – discovering it will be very tough to boost output even as global demand soars.

Shrewd investors will reap the benefit of those decisions: Those shortages will persist, providing quite a tailwind for soaring prices.

Just make sure that your sails are fully deployed.

Source: The “Secret” Investing Strategy That’s Your Best Bet For Commodity Profits

Editor’s Note: If you’re new to the commodities-investing arena, and are uncertain about the landscape – or even if you’re an “old hand” at natural-resource stocks, but want some insights into the new profit plays and new players – consider hiring a guide: Money Morning Contributing Editor Peter Krauth , a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called “Secular Bull Market” in commodities. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we’ll see in our lifetimes. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, please click here. ]]> http://www.contrarianprofits.com/articles/the-%e2%80%9csecret%e2%80%9d-investing-strategy-that%e2%80%99s-your-best-bet-for-commodity-profits/18915/feed 0 http://www.contrarianprofits.com/articles/the-world-gold-council-wrong-about-gold/17009 http://www.contrarianprofits.com/articles/the-world-gold-council-wrong-about-gold/17009#comments Thu, 21 May 2009 20:29:22 +0000 Adrian Ash http://www.contrarianprofits.com/?p=17009 Deprecated and reduced as a financial asset, gold is fast-gaining new buyers yet remains under-invested compared to previous crises…

“FEAR, Mr. Bond, takes gold out of circulation and hoards it against the evil day,” as 007 learns from a Bank of England officer in Ian Fleming’s Goldfinger (1959).

So “in a period of history when every tomorrow may be the evil day, it is fair to say that a fat proportion of the gold dug out of one corner of the earth is at once buried again in another corner.”

Evil-day gold buying really motored since the credit collapse began in August 2007. Soaking up investment dollars worldwide, in fact, new allocations to the metal – whether trust fund or owned outright – swelled…

This from Eric:

The flaming embers of inflation have already landed atop the thatched roof of American finance. And yet, investors can still buy inflation insurance on the cheap. In the next 1,373 words, we’ll examine a few of these “insurance policies”to assess their virtues and drawbacks.

Since a powerful new inflationary trend is very likely to occur, the prudent investor should probably take steps to guard against it. “But wait a second!” some readers be saying. “What if a powerful deflationary trend occurs first?”

Good question. It might. But we’d begin preparing for inflation anyway. Why not prepare for the near-certain arrival of inflation, rather than the uncertain timing of it.

If an infallible clairvoyant told you that your house would burn down in one of the next five years, would you say to yourself, “Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years.”

You might actually guess correctly, in which case you would have saved yourself four years worth of insurance premiums. But you might guess incorrectly, in which case you would have lost your house.

Your call.

To this market observer, inflation seems like a near-certainty. Not an absolute certainty, mind, you, just a near-certainty, sometime within the next three years. So why not beat the rush to buy inflation insurance? Why not buy some now?

The nearby chart displays a sampling of inflation hedges, and how they performed during the last eight years of the infamous 1970s. Gold was clearly the standout winner. But we’d put an asterisk next to this result, due to a performance-enhancing assist from the U.S. government. During most of the preceding four decades, the US government had been artificially suppressing the gold price, while also forbidding private citizens from owning it. Therefore, once the government stopped its meddling, the gold price partied like a teenager whose parents had just left town.

Aside from gold, very few assets managed to keep pace with inflation, as measured by the Consumer Price Index (CPI). Hard assets like the CRB index of commodity prices and the Swiss franc did outpace the CPI, but stocks and bonds both lagged miserably.

Skipping ahead about 30 years, we can see that the modern versions of the 1970s inflation hedges have performed quite poorly during the last 14 months. Clearly, inflation is not a widespread concern. But that’s part of the reason it concerns us, and also part of the reason why we’d be inclined to take action now, while inflation hedges remain relatively cheap.

Our contrarian instincts lead us –rightly or wrongly – to distrust the consensus, especially when the consensus trusts in an idea as stupid as deflation…just kidding. We don’t think deflation is stupid, just unlikely. (More precisely, we suspect that deflationary indicia will be seasonal, like daffodils. For a while, they will seem to be everywhere. Then, just as suddenly, you won’t be able to find a single one).

So with that biased and unscientific preface, let’s sweep through a Reader’s Digest review of ETFs that might provide some kind of hedge against inflation:

1. Gold – The “Old Faithful” of hedges. It’s always worked before. Enough said. ETFs like the SPDR Gold Trust (GLD) provide easy access. With a $30 billion market capitalization, this is the “go-to”gold ETF. The next largest entrant is the iShares Comex Gold Trust (IAU) with a market cap of $2 billion. Both ETFs enable an investor to buy gold with a mouse-click. No muss. No fuss. But purists may wish to buy bullion coins like Krugerrands or Maple Leafs. As a gold investment, bullion coins have the advantage of being shiny, pretty and portable. But they have the disadvantage of costing 6% to 10% more than bullion itself, while also being so shiny and pretty that someone might want to steal them.
2. Gold Stocks – The bastard brood of gold and the stock market. As inflation hedges, gold stocks can be somewhat unpredictable and capricious. Over a multi-year span of time, they tend to reflect that gold side of their heredity. But during shorter time spans, gold stocks can behave much more like stocks than like gold…and that’s not always a good thing. That said, ETFs like the Market Vectors Gold Miners (GDX) provides a handy way to buy a basket of gold stocks.
3. Commodities –Like gold, a basket of commodities that includes crude oil, copper, wheat, gold etc. tends to provide a very reliable hedge against inflation. Unlike gold, a basket of commodities provides diversification across multiple assets and therefore, much lower volatility than gold. The largest commodity ETFs available are the PowerShares DB Commodity Index Tracking Fund (DBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG). DBC holds only six commodities: Crude oil, heating oil, aluminum, corn, wheat and gold. GSC holds a much broader collection of commodities.
4. Commodity-focused stocks. See comments on #2 above. The iShares S&P North American Natural Resources Sector Index Fund (IGE) provides broad exposure to commodity-focused stocks. Alternatively, the DWS Global Commodities Stock Fund (GCS) is a small closed-end fund that holds a similar portfolio. But GCS is selling 12% below its net asset value, which means that a buyer at the current quote controls one dollar worth of resource stocks for only 88 cents.
5. Non-Dollar Bonds – The Swiss Franc performed quite admirably during the last Great Inflation in the United States. But we are hesitant to bet on a repeat performance. Indeed we are hesitant to bet on ANY foreign currency as a way to hedge against US inflation. The Swiss economy, for example, no longer features a bunch of pocket-watch-toting gnomes guarding vaults full of gold bullion. Instead, the modern Swiss economy features pocket-watch-toting gnomes masquerading as hedge fund managers. The predictable result is that Switzerland’s two largest banks have amassed questionable derivatives exposures that exceed the GDP of the entire country. Many other bankers speaking many other languages have achieved equally enormous feats of stupidity. No one knows how these feats of stupidity will influence the values of their native currencies. Not knowing, therefore, we are disinclined to guess. But those readers who suspect that the dollar will be one of the first currencies to go down in flames, rather than one of the last, might be interested in the one of the many ETFs that hold foreign currencies. The CurrencyShares Swiss Franc Trust (FXF), for example, holds Swiss francs. Alternatively, the dollar-phobic investor could purchase the SPDR Barclays Capital International Treasury Bond ETF (BWX) that holds a basket of bonds issued by foreign governments. Its largest allocations include a 23% weighting in Japanese government bonds, 12% in Germany and 12% in Italy.
6. TIPS –No discussion of inflation hedges would be complete without mentioning TIPS, short for Treasury Inflation-Protected Securities. [To learn more about how they work, check out the November 26, 2008 edition of the Rude Awakening]. Investors may purchase a basket of TIPS by buying the iShares Barclays US Treasury Inflation Protected Securities Fund (TIP). In theory, TIPS provide a direct and reliable hedge against inflation. But like so many other seemingly brilliant ideas, TIPS work better in theory than in practice. The first risk is an overt one – deflation might persist for longer than expected (by us). In which case, the principal value of a TIP could decline below par. And even though the holder of the TIP would receive par at maturity, the interest payments that the holder would receive between now and maturity would decline in concert with the declining principal value. The second risk is a covert one: the federal government controls the calculation of the Consumer Price Index (CPI). Therefore, if the CPI, as currently constructed, were to get out of hand and produce very high inflation readings, the government’s bean counters would probably spring into action to create a “new and improved”CPI that would deliver much lower inflation readings. It has happened before.

Thus concludes our review of inflation hedges. We hope all readers will utilize the delightful deflationary interlude we are now enjoying to prepare for what may lie ahead. Hostile inflationary forces may be amassing their forces at the borders of our economy at this very moment. In short, we think it’s a good time to risk being paranoid about the threat of inflation.

Source: Inflation Gestation

This from Lee:

In this globalized world, it’s no surprise to see the world’s financial markets intertwine in some fashion. That’s why we continue to see volatility run at much higher levels – be it in the stock market or commodities sector.

In the past, the physical and agricultural commodities have typically had very loose ties to the movement of the stock market. After all, why would the falling share price of Dell Inc. (Nasdaq: DELL) have anything to do with the price of corn or sugar? Ordinarily, no reason at all – but it’s not as simple as that any more…

A Changing Commodities World

The commodities world has changed in recent years – and if you know how to play volatility to your advantage, it’s changed for the better. Here are just three quick reasons why…

1. Instead of farmers merely using the commodities markets to hedge their crop, commodities have become more of a speculative game today.
2. It’s become very easy to trade commodities with a click of a mouse today.
3. Commodities are now seen as a viable and valuable portion of investment portfolios.

As a result of these three reasons, commodities are more subject to large money flows into and out of markets. With more individuals holding more commodities, they can sell off just like any other asset. And this can occur at the same time and with the same force as it does in the stock market.

In particularly volatile, and often irrational, markets like the current one, once the herd mentality takes over, the true fundamental value of crops can get unceremoniously shoved to the back burner in favor of what the crowd is doing.

In any event, the markets seem to have decided which direction they’re going to head in: Down…

Remarkable Value Amid The Market’s Rubble

Speaking of that irrationality I just noted, that’s pretty much the only way to sum up the price of numerous top-quality blue-chip stocks today. Many are trading at 15-year lows, with some even under $10.

But while this may cause some investors to throw a big pity party, if you believe in the long-term viability of the markets, putting some of your money to work today while everyone else is selling, it could present one of the greatest buying opportunities in a lifetime.

As for commodities, they will continue to trade on long-term fundamentals such as crop-growing cycles, weather patterns, herd size, supply and demand, etc. And there are some terrific opportunities here, too. So let’s get to it…

OPEC’s Winter Move Might Not Play Out Till Summer

In July 2008, the oil market began a downtrend that is still going strong today. The black stuff continues to make new lows, interspersed with quick bouts of short-lived upside rallies.

But once the price hits the descending moving averages (see chart below), the market gets knocked down again.  The combination of large oil supplies and waning worldwide demand has kept oil on the defensive, with $25 a barrel still in many analysts’ sights.

Three months on from OPEC’s supply cuts, we’re still waiting for the decision to factor into the market. At the moment, the farther-dated oil futures contracts are still moving lower in tandem with the front-month futures contracts.

I don’t think we’ll see the cuts make a dent in the market until at least June, so it looks like status quo for oil for the time being.

Two Ways To Play Our Bullish Outlook On Natural Gas

In a word… bullish.

That’s my take on the natural gas market, as the front-month futures contract has dipped below the pivotal long-term support area of $4.500 per MMBtu – a solid support level since late 2002.

At current levels, I continue to have a long-term bullish outlook. So how can you play the market?

1. Bullish trades involving long-dated, limited-risk options strategies (like option credit spreads) on natural gas futures options contracts, which trade on the NYMEX.
2. Invest in the Natural Gas exchange traded fund UNG that trades on the New York Stock Exchange.

I currently hold bullish natural gas positions in my Instant Money Trader and Triple Zone Profit Trader service that we run.

Knowing how the market can react to the upside with the threat of cold winters in the Northeast (where a majority of natural gas is consumed) and possible damaging hurricane activity on natural gas rigs in the Gulf of Mexico, I feel bullish plays here have a great risk/reward profile.

When You See The Dip… Buy

Amid all the financial market’s doom and gloom, one of the lone bright spots comes from a sector that we’ve mentioned as a pocket of strength for several weeks here.

It is, of course, the metals market – home to stalwarts like gold and silver.

Since December 2008, both have bounded along and made large upside moves. April gold futures have now crossed the watershed $1,000 per ounce mark – an area not seen since July 2008 – while May 2009 silver futures have managed to pop through $14.50 an ounce – silver’s first foray to that level since August 2008.

In mid-December, we noted that the gold and silver markets were beginning to look tradable again after washing out the speculative selling that had knocked the sector down from its all-time highs in July 2008.

With more “rational” investing now in these markets, and with global stock markets and economies still in turmoil, it continues to keep hard assets like gold and silver as the “go-to,” en vogue safe haven play.

Since we’ve already reached our near-term gold price forecast from the my previous column, plus our silver price outlook, too, we now believe that investors should step into bullish plays on large pullbacks in the gold and silver markets. It’s a strategy that should serve you well for the rest of 2009.

Look for gold to re-test the $865 area, while silver should re-test the $12.00 per ounce level.

And the way to play it…?

Other than looking at limited-risk option strategies from the COMEX futures options market, you can invest in the gold and silver markets through shares in ETFs like the SPDR Gold Trust (NYSE: GLD), Market Vectors Gold Miners (NYSE: GDX), or iShares Silver Trust (NYSE: SLV). You can also play options on these ETFs.

Drifting Below Support… And Creating Better Value

Having touched support levels that we thought would hold, the coffee and cotton markets have continued to drift lower. This will create an even better level to go long from and we’re just waiting for both markets to find a level that sticks.

With A Big Move Back Down, OJ Is Setting Up A Great Potential Entry Point

Lastly, I want to show you a long-term chart for orange juice futures.

This is another market we’ll be watching closely, as it’s now just about retraced the big upside move it made since the wave of hurricanes hit the Southeastern portion of the United States, beginning in 2004.

Each year, during late spring/early summer, the OJ speculators come out of the woodwork, trying to capitalize on potential disaster trades.

If OJ futures can re-touch the lows of 2004, it could be a great place to put in a low-risk bullish trade that aims to take advantage of any disruptions to the orange juice crop from this season’s hurricanes.

Lee Lowell

Source: Investing in Commodities: 3 Reasons Why Commodities Have Changed

This from Money Morning:

In November 2002, Federal Reserve Chairman Ben Bernanke cracked wise in his now infamous ‘Helicopter Theory’ speech. When it came time to pay our debts back, he said, we could simply fire up the printing press. The world would be forced to accept our paper in lieu of those debts. If need be, the Fed “could drop dollars from helicopters” in order to get the money into circulation.

Unfortunately, traders around the globe didn’t react kindly to his comments: Since his speech, the dollar has declined over 40% against a basket of world currencies.

It’s likely we’ll continue to see a steady downward trend in the dollar, occasionally punctuate by rallies as traders take profits. And it’s unlikely our government will be able to do anything soon to stop it.

Here’s why…

The Fed’s in a box

There are a number of factors weighing on or bouying the dollar. But Bernanke is the 300-pound gorilla in the current chess game – and his latest moves seem destined to keep the dollar in the doldrums.

The Federal Reserve, which rode boldly to the rescue in past economic slumps, can’t do much this time around. Cutting interest rates, as the Fed has been doing for the last year to spur economic growth, hurts the dollar. On the other hand, raising interest rates to help the dollar would probably send the economy into a tailspin.

Then there’s the economic facts of life…

The U.S. lives beyond its means, buying more than it sells. As a net debtor nation, we’re running a huge trade deficit with the rest of the world, about $700 billion annually.

That’s financed by foreign money inflows – mostly by foreign investors buying U.S. Treasury bonds. That leaves them holding an ever-ballooning number of U.S. dollars. Altogether, they now hold $3 trillion in government debts and liabilities.

The subprime crisis, a deteriorating stock market and consumer malaise has accelerated the greenback’s slide. The overall impact, is that the global market now takes a more cautious view of the relative strength of both the U.S. economy and the dollar.

The solution, according to the currency markets, is for the dollar to sink. That would cause U.S. exports to rise as U.S. goods get cheaper for overseas buyers. In turn, U.S. imports would fall as the declining greenback makes foreign goods more expensive for U.S. consumers and businesses.

However, there’s a large fly in the ointment. Having foreigners buy T-bonds inflates the money supply even as it leads to higher economic output and rising inflation.

Inflation rears its ugly head

The slowing economy has been a major concern for the Federal Reserve, prompting the central bank to make a series of interest rate cuts since last September. But the Fed has to figure out how to balance the risk of inflation against the risk of further weakness in the economy.

“Unacceptably high headline inflation has heightened the FOMC’s concerns about inflation, but continuing strains in the financial markets and evidence of spreading economic softness will force the FOMC to toe a fine line between the two risks,” David Resler, chief economist at Nomura Securities, wrote in a note to clients.

But, according to the government’s numbers, consumer inflation rose 0.8% in June, the biggest monthly increase since February 1981.

That figure is artificially low because drastic changes have been made in how it’s calculated. Food and energy are no longer even taken into account. In fact, using Consumer Price Index (CPI) calculations in effect during Clinton’s presidency, the CPI would be about 6% now.

A number like that sends shivers through the Fed’s bones. You see, once inflation has entrenched itself in an economy, getting it back under control is like pulling teeth.

But they really don’t want to talk about the “I” word.

The Federal Reserve stopped reporting the M3 value, the U.S. money supply, in 2006. Best guess is it’s increasing at about a 10% rate. But about $1.5 trillion of additional ‘money’ in bank bailouts and credit will be put into the financial system in 2008 alone.

When that much paper money is printed or electronically pumped into the credit markets you can bet your bottom dollar (excuse the pun) inflation will follow.

And that puts the main engine of the American economy, the consumer, on the defensive.

Consumers pull back

Make no mistake, consumer spending makes up about 70% of the U.S. economy. But with the foreclosure storm in full fury, and the credit crunch tightening the screws, the consumer is pulling in the reins.

So naturally, the feds are stepping up to the plate. Federal government spending rose at a real rate of 6.7% in the last quarter, while personal consumption rose only 1.5%.

Meanwhile, consumer spending is not even keeping up with income. The government recently handed out billions in tax rebates, which boosted incomes by 4% – more than twice the level of consumer spending increases.

So where does that leave the Fed? For now, in between a rock and hard place.

Any solution that would strengthen the dollar would probably involve sharply raising interest rates, increase the rate of savings, and curtail private consumption.

Don’t hold your breath waiting for those kinds of measures to come to your neighborhood.

No reason to panic…yet

Conventional wisdom has long held that foreigners would continue to support the dollar. After all, what could replace it?

But that argument may no longer hold water.

China with its $1.6 trillion, and other countries with huge reserves, are looking elsewhere to invest. Many governments, especially in the Middle East, have created sovereign wealth funds not limited to U.S. investments.

They’ve been plowing their winnings into foreign telecommunications companies, airlines and financial companies. China and India are spending their increasingly valuable currency on importing food, energy and other resources,

But despite the gnashing of teeth by foreign central banks, there’s scant evidence that they’re abandoning the dollar even as it tests new lows. The International Monetary Fund’s numbers show a slow shift from dollars into euros, with the dollar’s share falling to 63% of all global reserves in 2007, from 65% in 2006.

That doesn’t add up to a willy-nilly stampede out of dollars. Instead, look for a gradual decline in the dollar to continue as developing markets rake in more of the world’s cash.

What to do now…

Hedge with real assets: The inflationary nature of this environment means you should look to own the stocks of companies that produce goods, not services. Companies that own gold, ferrous metals and iron mines, for instance.

Gold isn’t reliant on a government promise to maintain the value of any currency. And while gold is up over 150% in the last 18 months alone, we think it still has room to run.

Martin Hutchinson, an analyst here at Money Morning, thinks you might want to consider

streetTRACKS Gold Trust (NYSE:GLD), an exchange traded fund (ETF). You might also look at Market Vectors Gold Miners (NYSE:GDX), which tracks the major players in the field.

Go Global: The current meltdown in the U.S. credit markets couldn’t have come at a worse time. Huge blowouts in dollar-denominated vehicles severely eroded the competitive edge U.S. dollar investments had over developing markets. That means foreign central banks will look to developing markets for the returns they used to get from U.S. assets.

Four places in particular stand to benefit. The BRICs (Brazil, Russia, India and China) all have burgeoning economies and significant natural resources.

Horacio Marquez, another of our analysts, likes Petroleo Brasileiro SA (NYSE:PBR), Brazil’s state-owned oil exploration company recently discovered the Tupi oil field, the second-largest discovery in 20 years. It also boasts top-notch management and leads the world in deep-water drilling technology.

If you’re looking for more safety and diversification, Rio Tinto PLC (NYSE:RTP) could fill the bill. It’s the largest iron ore supplier in the world and just signed lucrative new contracts to feed China’s voracious steel mills.

That gives you a starting place to look for relief from a weakening dollar. But the dollar probably won’t implode in a sudden burst of volatility. There’s simply too much riding on it for that to happen.

Here’s the bottom line – the value of the dollar is largely determined by the confidence investors around the world foresee in the future success of the U.S. economy.

For right now that confidence is flagging and is likely to continue to slowly let the air out of the dollar in the future.

Source: Why the Federal Reserve Can’t Save the Dollar