Commodities

The post-2001 great commodity super-cycle remains intact. Despite a brief but powerful bear market in mid-2008 triggered by the credit crisis, most commodities performed strongly in 2009. Still, the CRB Index remains 40% off its all-time high.

My favorite commodities in 2010 include the grains, coffee, cocoa, soybean and palm oil. I also like gold and silver but believe 2010 will be a moderate year for the metals, meaning maybe a 10% to 15% gain. I’m neutral-to-bearish on crude oil but like natural gas.

Investors like myself tend to get romantic about gold. After all, we’re in the midst of the greatest bull market in history since 2001. It’s hard not to love gold. Sure, it pays you squat in income. But the dollar also pays you nothing and even if it did, when adjusted for its long-term decline vis-à-vis gold and hard currencies what are you left with? The dollar is dead money. It also shares this role with the other drunks at the currency bar; only on a relative scale, the EUR and the rest are a bit better.

Still, since 2005 all currencies are declining against gold.

As I expect interest rate volatility to emerge in 2010 then I also expect a more subdued environment for gold and silver. Higher rates, if only temporary, will hurt gold and silver. Evidence of this price action has already begun since mid-December. But as we approach the second half of the year bonds will rally and so will most commodities, including the metals. I just think it’ll be a little bumpy over the first half.

By 2015, give or take a year or two, I think gold and silver will peak. By that time, prices should be about $2,500 or more for gold and $75 an ounce or more for silver. Sound outlandish? Eight years ago I forecasted similar projections at numerous international seminars; people don’t look at me like I’m crazy anymore.

Unfortunately, the last super-cycle for gold and silver will also coincide with a major conflict, crises or crash across world markets sparking the next global recession or worse. That will be the time to sell gold and silver. But it’s still not too late to buy gold or silver at these prices.

Currencies

Congress and America’s politicians literally live on another planet. These guys and dolls just keep on spending with no clear understanding about the long-term fiscal consequences. Someone should show Congress what a buck bought back in 1970 and what it buys now.

Of course, spending like mad goes back decades and was escalated by Reagan until Bush Jr. took the booby-prize. Now we have Obama and the financial crisis he inherited. What a mess.

The dollar is hated and unloved by most investors – almost a romantic relationship like gold but in reverse. The dollar might post a rally in 2010 on higher interest rate expectations and, possibly, a blowup or a renewed bank crisis in Europe, which would be dollar bullish.

Personally, I’d use any significant U.S. dollar rally as an opportunity to unload and buy gold, silver, Norwegian kroner, Canadian dollars and the Chinese yuan, which you can do through currency synthetics at Everbank. The CAD, by the way, is flat in December versus the surging American dollar while most other units are down sharply; that’s a bullish sign for the Canuck buck.

What would make me turn bullish on the U.S. dollar? Budget surpluses like the mid-1990s, a deficit VAT to reduce some of that never-ending red ink and less government in Washington. Also, U.S. military withdrawals in Iraq and Afghanistan.

Sadly, I have zero confidence in the dollar. Its best days are numbered. The American financial model is redundant and Asia is where the big money lies this century. Asia is now largely a creditor region – similarly to the United States after WW II.

It would be prudent for investors to follow the path of those nations that are surplus currencies harboring low-to-no external deficits and a high savings rate. The dollar, the reserve system and the global exchange-rate mechanism have been dysfunctional for more than three decades; at some point another currency or regional currency will challenge the dollar for supremacy and, like all economic confrontations, will probably result in a crisis, conflict and, ultimately, war. This is the history of nations.

This marks my last blog of the year as I head for vacation. On behalf of Eric, Dugald and The Sovereign Society team, have a happy, healthy and prosperous New Year. See you on January 4.