Cyclical, Secular or Just Bull?

There's been a lot of talk lately about the bull market in Commodities. Since 2001, most of the major commodity indices have risen by over 40%. That, in itself, is not unusual. Commodity prices are cyclical by nature, moving with the ebb and flow of the world's economy as a whole. It's wasn't very long ago that commodities in general were relegated to the dustbin of history, old economy relics that would scarcely be needed by the "new paradigm" world that would, presumably, survive on nothing but air, water and an AOL account. For those who take the long view however-the real long view, not the Saturday supplement variety, this sort of talk was welcome news indeed. Bull markets are sired by Bear markets and those who pay attention to cycles knew that the distain shown for anything non "new age" was a sure sign that it's time was at hand. No one doubts any more that we're in a bull market. HRA stated calling for one back in 2001 when we could see that the US Dollar was finally, (finally!) starting to show some signs of weakness. Now that we have the market that so may waited for, we have to climb the wall of worry every rising market faces. Being a cyclical sector, this wall is even taller for most investors. They know that commodity prices move both ways and no one wants to be the last one to leave the party. The question facing us all right now is: Just what kind of bull market are we in? Charles Dow, the namesake for the famous index felt there were a number of different trends that could be classified based on duration and size. Primary Trends are broad movement lasting 4-6 years, where each successive rally reaches a higher (or lower) level and each decline ends at an higher (or lower) level, depending on weather it's a Bull or a Bear trend. Secondary trends are much shorter, counter-cyclical moves (the bear market rally, or bull market decline) that are not large enough to violate the overall Primary Trend. The Granddaddy of them all is the Secular trend, which is made up of two or more Primary trends in sequence and lasts 5-20 years. The bull market in equities from 1982 to 2000 is the best known example of a secular trend. Of course, the story was a little different for most commodities, and especially gold. While the equities markets were celebrating the "greatest bull market in history" (ending in the greatest investment bubble in history) gold was going through a seemingly endless bear market of its own. To us at HRA, the evidence clearly indicates this is a SECULAR Bull Market. We won't know until it's over how long it will last, but we expect it to be long and its effects to be dramatic before its over. There may be Technical Analysts who can chart it and point to tops and bottoms and resistance levels and breakout points but our conclusion is based on fundamentals. Secular markets are always based ( Bull or Bear) on a confluence of events that have the strength and duration to move a market one way for a very long time before they run their course. We are in such a period. What's driving it? · The US Dollar - most commodities will move against the Dollar, though they all have their particular supply/demand factors. As the dollar weakens, commodities, priced in Dollars themselves, rise. The more "precious" the commodity, the more it has a tendency to act like a currency itself, giving it a stronger inverse correlation to the Dollar. Gold is the best example of this, though the move in the Dollar is strong enough to pull most Dollar denominated commodities in its wake. An often ignored side effect of this "Dollar driven" bull market is that in regions where the home currency has a strong negative correlation to the Dollar (i.e. Euro Zone, South Africa) capital intensive new resource developments are often actually inhibited. The strong local currency drives up costs in relation to the US Dollar price of the commodity being produced. You need only glance at a chart for gold in Euros or SA Rand to see how strong this effect can be. Another effect of this, if the commodity is one where there are enough producers willing to act in concert, is attempted re-pricing. There are few commodities that have a market with any sort of true oligopoly. The only widespread current example might be oil. Americans may find it confusing and ...

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