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Hard Times Ahead for Assets

Tuesday, December 27, 2011, 8:38 AM
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Hard Times Ahead for Assets

by Charles Hugh Smith, contributing editor
Tuesday, December 27, 2011

Executive Summary

  • Understanding the leading indicators for commodities prices
  • Either bellwether copper is cheap or stocks are expensive
  • S-curve analysis suggests we're entering a corrective phase for commodities
  • Why those long on on resource investing should take a defensive stance

Part I: Are Commodities Topping Out?

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Hard Times Ahead for Assets

Are commodities topping out? Since we know commodities are physically limited in supply even while demand continues to rise, common sense suggests that commodities will outperform over the long term for as long as industrial civilization continues its consumption of those commodities.

However, it is also clear that the global economy is either slowing or entering an actual recessionary contraction. Thus it behooves us as investors to ask what that contraction of demand might do to the prices of commodities over the near term (i.e., the next 24 months, 2012-2013.)

In Part I, we examined the connection between stock markets and demand for commodities as reflected by the chart of the Reuters/Jefferies CRB Index, the commonly used bellwether for the commodities market. We determined that if the stock markets of China and India are indeed leading indicators of demand for commodities, then the market for commodities will likely weaken.

We also found that margin debt seems to be far more closely correlated to the US stock market than demand for commodities as reflected by the CRB, meaning the US stock market may not be an accurate leading indicator of commodity demand or pricing pressure.

In Part II, we examine a key technical correlation that has withstood the test of time, that of copper and the stock market, and explore a potential key dynamic which may exert outsized influence on the demand and pricing of commodities over the next few years.

As a side benefit, our examination of the commodities may also shed light on the direction of the stock market — another key interest for many investors.

 

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