Will Commodity Prices Reverse Course and Head Higher Soon? - Gary Christenson (27/12/2017)

December 27, 2017

The factories and people of the world need commodities, crude oil, copper, nickel, coffee, wheat and others.

But listening to the media, we might think paper stocks, bonds (debt) and Bitcoin are all that matter. Think about it…after a quick trip to your favorite coffee shop, while you enjoy a coffee and muffin, and watch a video on your smartphone, check the prices for your favorite tech stocks, Bitcoin, and the latest celebrity news.

Your trip to the coffee shop used gasoline, oil, coffee, sugar, wheat, electricity, water and others. You used commodities but Bitcoin, a ten year Treasury note, and Facebook stock were not directly necessary for your morning coffee experience.

Have digital and debt based paper “assets” crowded out common sense and the importance of commodities? Yes, but not for long.

Look at the graphs of Netflix and Amazon stocks. Yes, they might rise farther, but at what risk?

Both charts show near vertical rises, highly over-bought monthly Relative Strength Indexes (RSI) and could easily drop 30 – 70%. The NASDAQ 100 Index dropped 84% from its year 2000 high before it hit a nasty bottom. It could happen again.

WHAT ABOUT COMMODITIES?

We need them for our trip to the coffee shop and to feed, house, cloth, transport, heat and cool over seven billion people. We may not need the latest Apple phone (about a thousand U.S. dollars) but we do need commodities.

The Thomas/Reuters Commodity Index dates back to about 2001. Crude oil prices are a significant portion of any Commodity Index and are a long-term proxy for commodity prices.

Examine 30 years of crude oil prices (times 10) divided by the S&P 500 Index. This ratio shows relative strength between crude (commodity prices) and the S&P – a paper asset.

The ratio declined through the 1980s and 1990s, reached a low in 1998, rose into 2008, and has declined since then. The ratio indicates that crude oil prices are too low and the S&P 500 is probably too high.

Expect a reversal. Commodity prices should rise in coming years.

Examine 30 years of silver prices (times 100) divided by the NASDAQ 100 Index. This ratio shows the same structure as the crude to S&P ratio. The ratio fell in the 1980s and 1990s, reached a low about 2000 and rose into 2011 when silver prices spiked to nearly $50. In 2017 the NASDAQ is high, silver prices have been subdued for over six years, and the ratio has fallen to nearly 20 year lows.

Expect the ratio to rise, silver prices to rise, and the NASDAQ to fall back to more normal valuations. See the graphs of Netflix and Amazon for hints as to how far the NASDAQ can fall.

Per Yahoo (December 20, 2017), the Price to Earnings (P/E) ratio for Netflix is 188 and for Amazon is 301 – rather high.

Prices can fall because investors no longer believe sky-high P/E’s are justified, or because earnings fall, or both.

Prices could rise into the stratosphere, as they did in 1999 and early 2000, before the NASDAQ Index fell 84%. However, the risk of a substantial drop is huge, while the potential reward for Amazon rising from $1,200 to $1,500 is 25%. Silver at $16 could rise 25% to $20.00 in a few weeks. Amazon stock might not rise to $1,500 until the next decade.

Risk versus reward!

WHAT ABOUT SILVER?

Silver prices do relatively little for years and suddenly become exciting. Silver prices made a large rally from $9.00 in late 2008 to nearly $50 in April 2011 when they were forced lower by worried “paper pushers” and the COMEX. Prices have been “asleep” since 2014, are near the bottom of an up-trending support line, and are very low compared to the NASDAQ (above), DOW (not shown) and the S&P 500 Index (not shown).

The world needs silver for numerous industrial applications, medical uses, coins, and investments. The latest iPhone costs about the same as 60 ounces of silver. That cost might drop to ten ounces of silver in a few years.

As central banks, governments and commercial banks “print” fiat currencies by the trillions (they are) and devalue all fiat currencies (they will) the purchasing power of those currencies declines and prices rise. The newly printed digital and fiat currency units enter the economy and create rallies and bubbles in one sector after another.

Crashes follow bubbles!

Sector Date and Price Date and Price

Silver 1979 $6.00 1980 $50.00

NASDAQ 100 1999 933 2000 4,800

Crude Oil 2007 $51 2008 $147

Silver 2010 $15.00 2011 $48

Netflix 2012 $8.00 2017 $204

Amazon 2008 $35 2017 $1,213

*** Going down!

Silver 1980 $50 1980 $11.00

NASDAQ 100 2000 4,800 2002 800

Crude Oil 2008 $147 2008 $36.00

Amazon 2017 $1213 2018 ???

WHAT ABOUT COMPANIES THAT MINE COMMODITIES?

Great Panther Silver made an announcement regarding their Coricancha Mine in Peru.

Quantum Cobalt had an oversubscribed private Placement. Cobalt is important because of the increasing number of electric cars, among other uses.

Gold mining stocks are “rising from the dead” and have moved higher since January 2016, an indication that gold, silver, and other commodities will rise in coming years.

CONCLUSIONS:

• Over-bought and over-valued markets (Amazon, Netflix and a thousand others) always correct. Sometimes they crash and wait years or decades to recover.
• Commodities are necessary for manufacturing and seven billion individuals. Prices are showing signs of life and could rally for years, particularly as distraught central banks choose between economic depression and “printing” to reflate current bubbles. Their “printing” will boost debt, debt service, consumer price inflation and market stress. Commodities will benefit.
• Analysts believe that nickel, LNG, and uranium will be strong in the year ahead. I like silver and related stocks. Do you own due diligence but don’t trust that paper assets will rise forever. Remember crashes in 1987, 2000, 2007-8 and others.

• Risk in paper assets including most stocks and bonds is high. Bubbles crash – but timing is unpredictable.

• Gold and silver will rise much higher in coming years, unless we get responsible government, balanced budgets, national debt reductions, and curtailed war efforts.