Over the last century, we have experienced five bull markets in commodities, or one, on average, every 20-30 years. There have also been prolonged periods when stocks performed well while commodities floundered, a number of them contemporaneous to one another. For example, in the late 1960s and 1970s, commodities prospered and stocks underperformed. In the '80s and '90s, the situation reversed, with stocks thriving and commodities performing poorly.

The last major, or 'primary' bull market in commodities ended in 1981. Prior to that, the decade of the '70s witnessed a huge boom in the demand for commodities with an accompanying increase in raw material prices. Investors were seen diverting money from paper assets into energy- and precious metals related investments. Amid tensions in the Middle East and the resulting oil embargos, oil prices soared to $40 a barrel, and gold vaulted to $800 to the ounce. Prices for many other commodities increased as stockpiles were built up to meet the increasing demand. The rising prices attracted speculators which drove prices up still further. Engulfing us all was a frenzy of investment intended to increase the production of 'undervalued' raw materials; the public, to be sure, was convinced that oil would soon surge to $100 a barrel, and a troy ounce of gold was going to eclipse the $1000 mark.

Lest the average investor be left behind, a mad rush to jump aboard the raw materials bandwagon ensued, only to collapse of its own weight. (This scene was, substantively, no different from the more recent high tech-led feeding frenzy that created and then burst the stock market bubble. And, as in the tech boom, where rampant over-investment produced a huge overhang in supply, causing the tech bubble to burst, the commodity bubble also burst.) True to form, this most recent commodity bear market has lasted almost 30 years. Now, however, based on the price action of several key commodity indices, there are signs that the bear is out of hibernation and, in its place, a new primary bull market in commodities is underway!

(Note: Tech stock investors should take heed from the boom and bust cycle in commodities. While there are fierce bear market rallies after a market bubble bursts, history has repeatedly shown it takes many years to work off the excess glut of a major bull market, be it in commodities or stocks!)

Now many analysts believe, the cycles have reversed, resulting in a secular bear market in stocks, and a primary bull market in commodities. There is plenty of evidence to support this assumption!

Many commodities have been "basing out" and in the process forming technically strong double and triple bottoms. Numerous investors remain unaware of what has been transpiring in the commodities markets, thinking it is the major stock indices that are on a "tear." Think again, we suggest! Commodity indices have far outpaced stocks, bonds, and even real-estate where, since 1998, the Rodgers International Commodity Index has risen by over 100%.

In support of the facts, another key indicator, The Goldman Sachs Commodity Index (GSCI), returned 69% in the five-year period ending September 2003, compared to 5% for the benchmark stock index, the S&P 500.

It is important to note, with commodity prices depressed for so long, there is comparatively very little investment underway designed to increase production in natural resources to meet increasing demand. Planning, designing and implementing the means for producing and processing many raw materials often requires a long lead time-one that may require years. In the process, demand for certain raw materials can potentially outstrip supply, leading to major price spikes in commodities.

Inventories of many key commodities are now already at historically low levels. For example, the ratio of food stuff inventories to annual consumption was around 35% in the 1980s; it is now in the low teens. Crude oil is again over $30 a barrel. Cattle prices reached historical new highs. Gold, as a measure of political and economic concern, returned to the $400 level for the first time in five years.

With inventory supplies down, and demand increasing, many commodities, among them gold, copper, soybeans, cocoa and cattle have been leading the commodity indices to highs not seen in many years. For example, another widely followed marker, the Commodity Research Bureau Index (CRB Index), reached seven year highs. See charts below.

Inflation Inevitable

Over the past two years we have had the "mother of all stimuli" impact the US economy. The government has kept the presses working overtime, printing money backed only by good faith. In the process, our budget, and trade deficits have reached record levels. In only 18 months, our federal budget went from surplus to deficit- a swing of $700 billion! Cutting interest rates to practically zero, the government lit up the housing market, adding hundreds of billions of dollars to the economy through mortgage refinancing and construction. Many feel, with the almost uninterrupted growth of the US budget and the trade deficit, the depreciating US dollar, strengthening global economies and ever increasing demand from raw material 'starved' nations like China, we are poised at the start of a sustained major bull move in commodity markets. Additionally, in a presidential election year, we doubt we'll see any fiscal restraint which could impede the incumbent president's reelection.

We believe the stock market is in a secular bear market rally, of dubious length and upside potential, while the long dormant commodities markets are now in the throes of a major new bull market imbued with significant upside potential. For suitable investors, commodities are the place to be!

The commodities which are receiving the lion's share of press include gold, crude oil, the US dollar and the Euro currency. It is our feeling these markets will continue their current trends, with prices moving higher in gold, oil and the Euro, while the Dollar continues to trend lower. However, a number of commodities remain near historic lows, and we believe these potentially present a classic opportunity for investors. There are also several investment strategies available to qualified investors that attempt to capitalize on the commodity markets, including the limited risk use of buying options.

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Past performance is not necessarily indicative of future results. The risk of substantial loss exists in futures trading. An investor can potentially lose more than the initial investment.