Gold's Day Has Come

The Fed's policy statement yesterday amounted to a move from being mildly accommodative to neutral. Neutral in an environment of negative real interest rates (and growing more negative daily) is powerfully bullish for commodities. Throw in Goldman's latest capitulation on the financial services/banking sector (basically downgrading to sell until the next millennium) and the consumer discretionary stocks signals more gloom and certainty the Fed is "trapped to talk."

Three years ago or so, I had a lengthy discussion with a friend of mine who was the director of the bond portfolios for a major institutional advisory firm (they run many of the portfolios for Vanguard and Calpers). He is now the director of the currency portfolios for this firm and has a better grasp of the macro conditions in the world than anyone else I know.

In the course of our conversation, he advised me to be a little more patient and rein in my expectation for the price of gold. He told me that there will come a time when the Fed will be trapped in their ability to protect the dollar and that will be the time to make the big bet on gold. Well, that was three years ago and I believe that we may have finally reached that point.

"Marc Faber Says Commodities Will Fall in Second Half"

In Bloomberg article that appeared today with the title above. Faber believes that we are on the cusp of a six to twelve month correction for commodities after which time the rally will resume for another decade. This would be consistent with the view of most commodity bulls, but it directly opposes my view that the commodity rally will continue to be virtually unabated until sometime in the first quarter of 2010 and flame out in spectacular fashion.

Earlier this week I wrote in the commentary, "Is the Party Over?" that we had to be open to the possibility of a "deflationary outcome." It does appear that we are going to break through support levels on the major indices. But based on yesterday's Fed policy statement, much less hawkish than traders were expecting, commodities have been given the green light. The "deflationistas" are counting on flows out of world equities and into US bonds, resulting in a strengthening of the US dollar. I disagree with them and Marc Faber (Marc short term bearish call on commodities). I think that US treasuries are in the process of ceding their "safehaven" status to hard tangible assets.

My "decennial bullish call" for the final commodity rally remains intact. With monetary and inflationary concerns trumping the emerging market growth story, it is now time to expect gains in precious metals to bet other sectors within the commodities complex. Deteriorating economic conditions will also continue to be bullish for coal as concerns over the climate take a distant backseat to the ability of struggling consumers to drive to work and receive heat and electricity for their homes. Coal is abundant and cheaper (much cheaper) than any other alternative. It will be increasingly relied upon for our energy needs as we enter into an elongated recession.

Precious metals and coal: Load ‘em up and buy on the dips. The blow-off boom for commodities has arrived.

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