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Commodities Now Resembling Tops of 1951 and 1980


A look at how the present-day commodity bull market is starting to exhibit chart patterns resembling the two most recent secular commodity tops.

The first two articles of this series demonstrated how both commodity and oil spikes have invariably led to commodity bear markets. (See: The Worst Possible Asset Class to Invest in Right Now and Oil Spikes Have Always Led to Stock, Commodity Bear Markets.) In this third article we will take a look at how the present-day commodity bull market is starting to exhibit chart patterns which resemble the two most recent secular commodity tops.

The first pattern we shall examine is the 1951 to 2011 analog. Let's get into a little bit of fundamental background before we examine the charts. The commodity bull market which ended in January 1951 perhaps shares more similarities to the current situation than any other. Back then people were worried about debt. At the end of 1950 the Public Debt/GDP was 87%. At the end of 2010 the Public Debt/GDP was 93%.

Despite the United States' high debt levels (or perhaps because of it), inflation over the prior few years leading up to the January 1951 top was relatively mild. For the three years from December 31, 1947 to December 31, 1950 the inflation rate was 2.22% on an annualized basis. For the three years from December 31, 2007 to December 31, 2010 the inflation rate was 1.43%.

What was the best performing commodity in 1950? Cotton.

What was the best performing commodity in 2010? Cotton.

With this background, let's look at the chart patterns. Let's zoom in on the last few years of both the January 1951 commodity top and present day commodity bull markets.

First of all the early and middle years of these secular commodity bulls are not shown here so that we can focus more closely on a possible top analog.

Commodities rallied into March 1947. Commodities rallied into March 2008.

After the aforementioned rallies, in 1947 commodities experienced a 12.2% correction. In 2008, commodities experienced a 12.8% correction.

After those corrections, in 1947 commodities rallied 23% to put in a top which lasted a couple of years. In 2008 commodities rallied 22% to put in a top which lasted a couple of years.

Then a quick bear market set in. Commodities declined by 36% and bottomed in June 1949. Commodities declined by 47% and bottomed in December 2008.

Then in both cases commodities staged a major rally. The January 1951 blow-off top was 10.9% above the 1947 high. While the final blow off top of the current commodity market is yet to be determined, at their all-time high in early March, commodities were 8.5% above their 2008 high.

At the 1951 top commodities spent three months above the 1947 high before reaching their peak. The Continuous Commodity Index quietly passed its 2008 high on Dec 27, 2010 and took 2.3 months to reach their March 7, 2011 all-time high.

Many people have been predicting the commodity bull will last another five to eight years based on their false belief that all secular commodity bull markets last 17-20 years. However, it is difficult to find any example of a secular commodity bull market which experienced the type of decline we saw in 2008 (and subsequent spike) and then continued on for another seven to 10 years. That is what makes the 1947/Jan 1951 double top so intriguing. It provides a precedent of a commodity bull market which experienced a quick bear market, yet still managed to briefly reach new highs.

Well what happened next after the January 1951 high?

Commodities went down 35% over the next 2.5 years. They then proceeded to go nowhere for the subsequent 15 years before finally bottoming in 1968.

The ultimate bottom was over 17 years after the top. If today's commodity market would suffer the same fate it would bottom in 2028.

On a final note, the 1968 commodity bottom was 5.5% above the 1949 bottom. If a similar situation would occur, commodities would bottom in 2028 about 5.5% above their 2008 low.

Now let's take a look at the 1980-2011 analog.

The chart uses a fixed multiplier to place the 1968 bottom price at the same level as the 1999 bottom (i.e. the Y axis is present day prices). The 1968-1980 years are listed in the X axis. If we used the 1999-2011 years on the X axis instead, the first year would be 1999, the current red line peak would be at 2011 and the very right of the chart would be 2029.

It is interesting to note that the current commodity bull market has gone up even more than the famous 1968-1980 commodity bull. How often have you heard that mentioned? Also note this commodity bull has reached higher levels in less time than the 1968-1980 bull. Similarly, it is interesting to observe that the final rally (so far) for the current commodity bull is even steeper than the 1979-1980 blow-off top. Commodity bulls are planning to sell once they see a blow off top. This conjures up an image of OJ Simpson looking for the killer at the golf course.

It gets even more interesting. When commodities ended their bear market (on a daily closing basis) in 1999, they finished 3.8% above the low of the 1974-1978 consolidation period right before the final blow off top. Look at the chart and see.

In other words, the 1975/1999 double bottom was just like the 1949/1968 double bottom mentioned earlier in this article. The significance of this would imply that the 2008 lows may provide significant support over the next few decades.

If the current commodity bull market would mirror the 1951 and 1980 tops, commodities would top this year and get hit pretty hard over the next couple of years in particular. Commodities would eventually bottom around 2028/2029 about 3% to 5% above their 2008 low which is a 49% drop from the March 2011 highs.

The sources for this article include for commodity data and and the Treasury for debt and GDP figures.

Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
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