This One Chart Says It All For Commodities

A quick market update today before I get stuck into commodities.

The Dow Jones headed lower last week, closing at 17,164 points. Importantly, the Dow has now closed below the crucial 17,274 point major support zone and the 17,200 point support zone on a weekly basis. I’ve mentioned these targets over the past couple of weeks. See here for more details.

As a result, the market should go lower this week. The Aussie will follow the lead of the US.

For the Dow to head sharply lower, I’d like to now see a daily closing below 16,900 points.

Overall, I expect that market to head towards the 16,400 point level this or next week. I don’t expect to see the Dow fall much lower than that level. Albeit, 16,000 points remains the next support level.

Caution remains this week. I expect to see a sharp stock market correction before the bull truly unleashes in mid to late February. A weekly close above 17,900 points should indicate that the bull market is back in full flight.

Moving onto commodities….

Why the bullish US dollar calls for strategic investing

The bullish US dollar is a very serious risk for resource punters this year. As resource prices are denominated in US dollars, simple math dictates that they will fall.

The following graph shows you the inverse relationship between the US dollar index (red line) and commodity prices (blue line) from 2010 to 2014. You can see they’re almost a mirror image of each other.


Since the end of November 2014 — shortly after this chart was published — the US dollar index is up nearly 10%! Resource prices have been hammered across the board. Unfortunately, this is only the beginning.

Investors are clearly nervous about the future of the world economy. And seeing economic growth coming out of the US, they are flocking towards the US dollar —not gold — as a safe haven. This is evident as the US dollar index has gone straight up, with little selling resistance.

On the other hand, gold has struggled to find its legs and meaningfully climb above the US$1,300 per ounce resistance level. In my view, the bullish US dollar will soon be too much for gold to continue climbing higher. The hopeful gold bugs won’t know what hit them when gold declines to US$931 per ounce.

Gold stocks will be selling for scraps on the dollar mid-late this year. I’ll discuss this more in the Diggers and Drillers update next week. If you want to see the analysis, click here.

As investors become more fearful about the future, the US dollar will continue to rise.

This is why 2015 should mark the bottom of the trough phase in this multi-year resources bull market. The strong US dollar and crunching resource prices will catch many resource punters off guard this year. This act will define a true market bottom.

The next bullish phase of the commodities super cycle will start in 2016.

Resource prices will eventually rally with the bullish US dollar next year. That’s when you’ll see the inverse correlation in the above chart begin to break down. Investors will realise that the US dollar is no longer a true safe haven; even the US debt market is at risk of collapsing in a deflationary world.

At this time, the US$160 trillion global debt market will be in disarray and ready to collapse. Keep in mind, at this stage, it’s highly likely that we would see the Dow Jones trading above my 26,100 point target (ASX 200: 6,000 points) for this year. This exceeds all mainstream expectations. The issue will then become, where should you put your money?

Punters will start looking towards cheap real assets to protect their wealth. This trend will accelerate after the impending European sovereign debt defaults in 2016/17. This is why resources and gold will turn ultra-bullish next year…resurrected from the dead.

You, a wise investor, should see this year as an opportunity year.

Plenty of bargains await you to easily capture more than 100% gains  in the years ahead. Pick the best of the lot, and you’ll outperform the pack.

Take advantage now of the crude oil opportunities

A huge opportunity exists for buying quality oil stocks. Things are starting to get interesting…

Saudi Arabia’s King Abdullah died last Friday after 10 years in power.

With the largest oil reserves in the world and high oil prices, Saudi Arabia has been able to control the Middle East. This is why you’ve seen Western leaders trying to get into bed with the country’s royalty. For many decades, Saudi Arabia has been the rock of stability in an increasingly unpredictable Arab Middle East.

Unfortunately, the luxury of holding this position may change.

Saudi Arabia has become accustomed to high oil prices. Crude oil represents roughly 89% of Saudi Arabia’s budget. And its budget has indefinitely assumed above US$80 per barrel oil prices. Lower crude oil prices pose a risk to its budget and the stability of the region.

The population of Saudi Arabia is predominantly male, young and unemployed. Typically, Saudi Arabia has been able to suppress climbing social unrest thanks to higher oil prices.

Crude is now trading at roughly US$45 per barrel. And Saudi Arabia has predicted a US$39 billion deficit in 2015. This brings new challenges, including budget changes. The younger people of Saudi Arabia aren’t happy with the intended changes. We’re starting to see rising protests and significant backlash against the new reins of power.

Saudi Arabia’s neighbour, Yemen, has descended into dangerous chaos. It’s likely that you could see this social unrest spread into Saudi Arabia by the middle of 2016.

The Middle East is fast heading towards an all out civil war.

And — surprise — it looks like the US wants to get involved. The US is facing massive deflation and Obama’s policies are destroying what little wealth its middle class has left. A new war is just what the US needs to distract its citizens from this unwelcome reality.

US boots are heading to Iraq. And don’t be surprised when you see US soldiers in Syria by 2017. The mission has always been to topple Syria’s Assad. Russia and Iran won’t allow this to happen. The world faces escalating geopolitical conflict at a time when economies are extremely deflationary.

This isn’t good news.

Despite all this, we still face lower oil prices in the short term. I’d expect to see US$42 per barrel shortly. US$42 per barrel represents the long term technical trend line dating back to 2003. My year-end expectation is US$30 per barrel oil.

Geopolitical conflict is on the rise and is set to take off in 2016/17, driving oil prices higher. The resources bull market is set to resume in 2016.

That’s why now is time to prepare for the coming resources boom.

I’ve recommended the best oil stocks on the ASX in Diggers and Drillers. I expect these stocks to be taken over or bounce hard due to their strong fundamentals in the coming months. You can check out my analysis here.


Jason Stevenson,
Editor, Diggers and Drillers

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Jason Stevenson

Jason Stevenson

Jason Stevenson shares his extensive knowledge of Australia’s mining sector as Markets and Money's dedicated resource analyst. Whether it’s iron ore, gold, copper or lithium, you can rely on Jason to give you in-depth analysis of the biggest and most important sector of our economy. Jason provides in-depth research to Resource Speculator, Australia’s premier resource investment advisory.

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Jason, you’ve been pushing the line of gold hitting $931 for sometime now, and there is a possibility that you will be correct. However, a fundamental flaw I see in your logic is that gold is a currency, the ultimate currency, and not a commodity as you portray it. Gold can and has previously risen along with USD strength, and is currently breaking out in virtually every currency except the USD (though it has strengthened considerably since the Swiss gold referendum low). You seem totally and utterly convinced in the your language, and yet did you see the oil price… Read more »
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