Gold Versus Commodities
by Steve Saville
April 27/05
Gold tends to lead the CRB Index, but the lead-time can vary greatly.
For example, whereas 2001's major bottom in gold occurred about 8 months
in advance of a major bottom in the CRB Index the following chart comparison
shows that over the past two years gold has consistently led the CRB by
about 3 months. This 3-month lead by gold over the CRB was previously
discussed in the 2nd March Interim Update, at which time we said: "...IF
a major peak was put in place in the gold market in December (we think
it was) and the relationship of the past 18 months continues to hold then
a major peak in the CRB Index is likely to occur this month".
The jury is still out as to whether a major peak (a peak that will hold
for more than 12 months) was, in fact, put in place in March. We think
it was, but the evidence is still preliminary. In any case, there are
two important points we'd like to make regarding the relationship between
gold and commodities.
The first point is that the CRB Index isn't likely to make a bottom until at least a few months after gold has bottomed. This means that if the early-February low in the gold price continues to hold then the CRB Index could now be within a few weeks of a low of its own. However, if we are correct and the gold price is yet to reach its correction low then the CRB Index is most likely at least three months, and possibly as much as 12 months, away from a correction low of its own.
The second point, which is not related to the above chart, is that to
get from where we are now to the start of the next multi-year advance
in the gold price a large decline in the CRB Index will almost certainly
be required. The reason is that as long as the CRB Index remains near
300 the Fed will continue to tighten monetary policy. The Fed will continue
to hike...and hike...and hike...until the backward-looking data and/or
the financial markets confirm that the rate hikes are having a profound
effect. And a deflation scare due to tumbling commodity prices is the
sort of profound effect that would set the scene for the next round of
inflation and the next multi-year rally in the gold market. In other words,
the weaker the CRB Index becomes over the next six months the more bullish
will become the outlook for gold during 2006 and beyond.
Steven Saville
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