Are Commodities Preparing For An Inflationary Decade?

I’d like to look at the bigger picture and consider certain trends we may see over the next decade.

I think the deflationary pressures are waning and assets are slowly transitioning into an inflationary period. Major shifts like this require time. It often takes a few years for the old trend (paper assets) to fade and for the new trend (physical assets) to emerge. The more I look at the charts, the more I think commodities are forming significant bottoms, perhaps multi-year or even multi-decade lows.

First, let’s look at the DOW/CRB ratio. Paper assets performed well over the last several years…commodities not so much. It is evident in the chart below that commodities are incredibly undervalued when compared to stocks. I think various commodities are basing, some leading, some lagging, but they are ALL likely basing. Once the bottoming process is complete commodities may enter a multi-year bull phase outperforming stocks.

Next, let’s look at the Dollar. I’ve heard bearish and bullish arguments. Frankly, I see potential in both. So, let’s look at the monthly chart to draw some conclusions.

US Dollar Monthly

I found what appears to be an alternating 16-year cycle between tops and bottoms. If correct, then the Dollar may have formed a multi-year peak at the beginning of 2017. Breaking the 2018 low (88.15) would confirm a dollar bear market and promote a multi-year run in commodities. If the next inflationary period in commodities is similar to what occurred between 2000-2010, then various assets will take turns as the “hot” sector. The secret to making a boatload is figuring out where “hot money” is concentrating and get in before prices explode. Recall the rise in crude oil between 2007 – 2008? Prices rallied from $50 – $140+ in 16-months. Silver ran from $9.00 to $49.00 in a little over 2-years. The blow off phase of a parabolic run is always the strongest and most profitable.

Commodities Versus The Dollar

The commodities (CRB) versus dollar ratio may be nearing a major low. I think the 17-year cycle is close to a bottom. The question is…will it come down to tag the trendline like 1985 and 2002 or has the trend truncated and fallen short? These bottoms tend to arrive at the beginning of the year (January, February or March). Consequently, I think we could see one last dip down to the trendline. That corresponds with my view that oil should drop below $42.00 before securing a lasting low.

CRB Weekly

Back to the CRB. Prices should be approaching their 3-year low. The decline fulfilled the head and shoulder target, and prices are bouncing. A bottom is undoubtedly possible, but I feel the decline from 201 to 168 was too steep to form an immediate low. Typically, a very sharp decline like this requires a retest of the low or an undercut before finishing. I’m leaning towards an undercut in February or March. Note: Prices are currently testing the underside of the prior trendline and the 10-week EMA, a standard rebound target.

Oil Monthly

I’ve shown oil prices tend to bottom at the end of an “8” year or at the beginning of a “9” year…so we should be close to a bottom. Typically, prices dip below the lower Bollinger band (currently $41.50), and the CCI falls below -100, both came close, but neither occurred. Consequently, I remain on the lookout for another decline to meet the above technical criteria. Prices rally on average 340% from 8/9 lows.

WTIC Weekly

Buyers bought into support around $42.00. The weekly chart is now testing the underside of the 200-week and 10-period moving averages, as well as the mid-point of the prior consolidation. Oil would have to close progressively above the 20-week MA to support a more meaningful bottom. Otherwise, I’ll look for prices to consolidate and then dip to new lows in February or March.

US Dollar

The Dollar should be approaching a cycle low near its 200-day MA. The 20/50 are nearing a kiss, and that often times a reversal.

Gold Prices

Still no swing high after last week’s bearish engulfing candle. Prices are consolidating. Gold needs to form a swing high or close progressively below the 10-day EMA to establish a top. Big picture – I think prices are working on a massive base that will ultimately lead to a multi-year up phase (see next chart).

Gold Prices Weekly

I think a massive base is building and at some point, gold will break free and begin to trend. Commodities have been deflating. Paper assets were the place to be from 2009 to now. I think between 2019 and 2020 commodities will transition into the next outperforming assets. The switchover period is often rough and sometimes takes longer than we like. But I think investors that accumulate precious metals at these levels will be pleased 3-5 years down the road.

If commodities are basing, as I suspect, it may be wise to allocate funds or dollar-cost-average. Don't expect to get the exact bottom. The basing period could go on a bit longer, but it should be viewed as an opportunity to accumulate long-term holdings. I like physical metals during this phase. Miners are volatile and will remain challenging to trade until gold enters a sustained uptrend.

Near-term, I like the potential in oil. The pre-recession rallies that began in 1988, 1998, 2009 all carried about 240%. I think oil is setting up for another 200%+ run into 2020. I’ll look for a final low in February/March.

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