Commodity Super-Cycle Heads into Next Bull Phase

After suffering a modest correction amid the sub-prime hysteria earlier in August, the majority of commodities made a wicked u-turn in September and now trade at either all-time highs or close to record highs as we commence the fourth quarter.

The next phase, the most lucrative period for speculative investors in raw materials, is now upon us as the Federal Reserve, and eventually, the British, Canadian and European Central Banks start cutting interest rates over the next several months.

September was the best month for commodities in 32 years as wheat, gold, platinum and crude oil hit nominal records, or before adjusting for inflation.

Fed Unloads Rally

The catalyst for September’s major break-out was the Federal Reserve’s first interest rate cut in four years on September 18th as the central bank cut the discount rate to 4.75%. The U.S. dollar, already in a bear market since 2001 versus virtually every currency in the world, accelerated its decline the last ten days of the month and now sits at record lows versus the euro, Norwegian krone, Brazilian real, the Chinese yuan, the British pound and at a 31-year low against the Canadian dollar. The American dollar also hit fresh lows against many other units in Europe and the emerging markets last month.

Commodities, mostly priced in dollars, typically post significant gains amid extended declines for the world’s reserve currency. That’s because dollar-priced commodities are worth less when measured vis-à-vis other stronger currencies, like the euro. Also, a falling dollar is considered inflationary and commodities are historically a hedge against dollar weakness or a store of relative value.

For Commodity Trend Alert, a weekly investment signature service started in July 2001 ahead of the secular bull market rally for raw materials, September was one of our best months on record with huge double-digit gains. From a universe of 35 open positions heading into September trading, four securities closed lower with the remaining 31 positions earning big gains. Furthermore, out of 31 rising positions, 20 or 64.5% of our recommendations recorded double-digit gains last month.

Below is a six-month chart of the benchmark Reuters/Jefferies CRB Index, the most diversified commodity benchmark. Although the CRB remains 8.7% off its all-time high in May 2006 (365.35), the index has recently posted a significant break-out, smashing resistance levels and now looking to surpass its 2006 record high. With the Federal Reserve on track to cut lending rates again during the 4th quarter, additional dollar weakness is likely coupled with new highs for most raw materials.

Another major commodity index, however, is still hitting record highs.

With 70% of its constituent assets in energy futures, the S&P Goldman Sachs Commodity Index (GSCI) is the most heavily energy-weighted resource benchmark. Over the last several weeks, even as sub-prime fears rattled global markets, the GSCI hit new all-time highs on the heels of soaring crude oil prices. In September alone, West Texas intermediate crude gained 13% while the GSCI surged 10.3%.

The big news this fall remains the newfound momentum in precious metals.

Gold Heading to $1,000 in 2008

After trading in a range over the last 14 months, silver, platinum and gold collectively posted huge break-outs the week of September 17. Gold prices rallied 10% in September, touching 28-year highs while platinum hit a new record, up 8.6%. Silver, still off 8% from its multi-decade high in April 2006, gained 15% in September. The weakest precious metal in this bull market since 2001, however, remains palladium, up just 4% last month.

For gold-bugs, these are indeed glorious times. In September, gold stocks, especially the major and mid-cap producers awoke from the abyss to log big double-digit profits. The XAU Index, of Philadelphia Gold & Silver Index, trading the largest mining shares, blasted 20% higher last month.

Every facet of the demand-side equation continues to grow more bullish by the day for gold, including booming exchange-traded-fund purchases, declining global production, rising Indian and Chinese fabrication demand and growing emerging market central bank purchases as major economy central banks wind-down their free-market sales. Despite large swaths of Spanish central bank sales during the third quarter, gold prices remained resilient and even hit new multi-decade highs.

From Cheerios to Wheaties, Consumers are Paying More

Food inflation is now a major concern for consumers and foodstuff manufacturers following incredible rallies this year for wheat and soybeans, and to a lesser extent, corn.

Other less traded agricultural commodities -- bran, oats and barely -- remain on a tear over the last 12 months. With droughts a major problem in countries like Australia and parts of Russia, global wheat supplies have hit a 30-year low in 2007, resulting in supply deficits. Wheat prices surged 22% in September – the best-performing commodity.

Commodity Trend Alert, instead of riding potentially profitable but equally risky grain futures options, has been long and strong the grains since last January. Both of our diversified grain ETF positions logged double-digit gains in September.

So there’s the big picture for commodities. With the United States now easing monetary policy and the dollar dropping to new lows, prices for raw materials will, as predicted in these pages, head into the next phase of the commodity super-cycle. And over the next several months, I also expect the European Central Bank to begin cutting interest rates as economic growth continues to falter. Lower interest rates in the industrialized G-7 economies will encourage higher commodities prices and stimulate global demand to new heights as China and the rest of emerging markets develop their booming infrastructures and quietly dispense of devalued American dollars.