It’s lonely being a Commodity Bear
February was a phenomenal month for the resource sector. With continuing fallout from the subprime lending mess, the U.S. Dollar Index broke key support at 75, hitting fresh multi-decade lows, so commodity prices soared. Several key groups; from energy to grains to metals, all convalesced together to reach record highs. In all my years of investing, I can’t recall a stronger single month for commodities. After setting a new 2-year closing high in January, the CRB Index, which is now up over 33% since August, in February made the largest single month point gain in recent history.

Gold a moving locomotive
During the course of the month, sentiment towards gold and commodities in general turned uniformly, feverishly bullish. Almost, too much. To see so many people just turning bullish now on commodities, even after the tremendous run up in prices already, leads me to believe the sentiment is far too bullish.

Long term charts look toppy
My bearish reaction to the extremely bullish sentiment is validated when I review long term charts - from Crude Oil to Corn and Gold and the CRB Index itself. All these charts have gone parabolic, rising at unsustainable rates of appreciation since August and now they’re all butting up against their long term upper channel lines. Standard technical indicators such as the RSI and MACD are looking overbought, as they did at other major highs.
But you wouldn’t think that when you turn on the TV and listen to the commentators on all the business news programs. Everyone sounds as if this is some kind of ideal time to jump in. While I concede an object in motion stays in motion, and no reversals have taken place, this is no ideal time. This looks more like the final stages of a long uptrend that’s getting ready to revert to the mean and in a violent manner when it does!

...Focusing on just Gold now, the COT (Commitment of Traders) data has been decidedly bearish for months now. This tends to kick in early, but eventually large numbers of commercial shorts always get it right. Some say Crude oil deserves to be trading closer to $70 per barrel than where it is today over $100 and we are entering a shoulder season. Any moves in that direction would definitely hurt gold. I see Cramer is touting Gold stocks now (talk about being late to the party). Gold is a “Page 1 story” now (we want to buy the “page-16 story, that’s becoming a page-1 story down the road). Don Coxe does tell us that just because a sector reaches “page 1” from page 16, doesn’t mean the game is over. So this could go on for a while yet. But sooner or later it will run out of steam and the reversion to the mean is usually proportional to the incline, which has been sharp indeed.

..Some believe the commodity rally will continue until the mining stocks fully participate into May. Who knows. I think a reversal of the trend could occur at any time. All that’s needed is a catalyst, an excuse for traders to begin changing directions, and that this will come at any time without notice.

...It’s only a guess, but maybe, not long after the euphoria of breaking $1,000 runs it course, the price could peak, like it did when the price broke the big round number of $700 in May of 2006 and went a bit higher and then made a major high.

Editor’s note: The week after this Issue was released Gold and other commodities indeed began what appears to be an intermediate correction, with gold moving down below $900 within two weeks. No longer satisfied watching our core gold stocks shed 30% as they do each seasonal decline, and with the advent of Gold ETF’s, we have found an ideal way to play gold to the down side and actually make some money while awaiting the seasonal decline to run its course. This vehicle trades on the TSX and provides a combination of advantages not available elsewhere; it is liquid, it’s easy to follow and delivers leverage but without the hazards associated with short selling or buying options, making it the preferred vehicle.
To date, the price has appreciated from below $8 to over $10 and a trend reversal appears to have taken place. However, I believe there is more profit to be had since the seasonal down cycle is just getting underway. Our rough target price for the metal is $800. To obtain the full Issue of EGS with more complete details of the vehicle we have chosen to ride the golden bull - both up and down, and how we are playing it, visit our main web site where it is available at our standard single-Issue rates.

Please Note: The author is not a registered securities advisor
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Louis Paquette`s Emerging Growth Stocks is an independent publication committed to providing an objective analysis of the markets, focusing on the TSX-Venture Exchange and individual companies with substantial upside potential over the next six to twelve months. The information contained herein is believed to be accurate but this cannot be guaranteed. The analysis does not purport to be a complete study of securities mentioned herein, and readers are advised to discuss any related purchase or sale decisions with a registered securities broker. Companies featured in EGS are often at very early stages of development and can therefore subject to business failure, and are to be considered speculative and high risk in nature. Reports herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. The author may or may not hold a position (long or short) in the securities mentioned herein. This publication may not be reproduced without the expressed prior consent of the author. The author is not a registered securities advisor, and opinions expressed should not be considered as investment advice to buy or sell securities, but rather the author's opinion only.