Commodities and the Shares of all Commodity Related Companies Should be Avoided.

May 6

By Michael Markowski

Due to the action of the Euro or the profound weakness that it is having against the U.S. Dollar I am advising against the investment in or the holding of all commodities including gold and precious metals.  I am also suggesting that investors avoid the shares of those companies who are commodities oriented such as Alcoa (NYSE:AA), Exxon Mobil (NYSE:XOM), etc.  This includes the shares of the five remaining gold mining companies, which were originally recommended by BearMarketTracker on August 4, 2009.     

Since all commodities are priced in U.S. Dollars any significant change in the relationship or the exchange rate between other currencies and the Dollar results in a repricing of commodities in U.S. Dollar terms.  Oil is a good example of why this phenomen occurs because it similar to almost all commodities has price elasticity.  Price elasticity means that when price of something goes up the demand for it falls and vice versa.  Should the Euro fall by 50% versus the Dollar the price of a barrel of oil or a liter of gas would increase by 100% throughout Europe because it costs twice as much for a deflated Euro to purchase a U.S. Dollar, which is the universal metric, which is used to price oil and all commodities.  In simple terms, the spike in the price of a commodity in a country due to a 50% decline in its currency will significantly decrease the demand for that commodity in that country.  Oil or gasoline is good example because when the price goes up dramatically conservation measures are enacted such as the reduction of the usage of autos and increased usage of public transportation.  A significant decrease in the demand for gasoline increases the supply of gasoline with the only logical outcome being that the price of gasoline would have to decline.

Because all commodities have price elasticity its impossible for their prices to not decline when they are priced in a currency (U.S. Dollar) which is appreciating against other currencies (Euro).  Therefore, in order to maintain the equilibrium between supply and demand a 50% decline in the Euro versus the U.S. Dollar would likely result in a 50% decline in the price of the commodities in U.S. Dollar terms. 

Should the Euro fall from its all time high versus the Dollar back to its all time low the move would account for a decline of 50% from peak to trough.  Should this happen the prices of all commodities would likely decline by 50%.  That means that all commodities and commodity related shares such as oil and energy companies are likely to have serious headwinds and price declines should the Euro continue to decline versus the U.S. Dollar and other currencies.  There is an old saying that “one can not fool mother nature” and that is precisely why it is impossible for the prices of commodities, which are quoted in an appreciating currency to go up.  

Based on the accelerating appreciation of the U.S. Dollar against most other currencies we are removing all remaining gold stocks from the list that was originally put out on August 4, 2009.  The shares of the companies being removed are as follows:

• Capital Gold Corp, (CGC)
• Golden Star Resources (GSS)
• Claude Resources (CGR)
• Kinross Gold Corp (KGC)
• Aurizon Mines (AZK)

For more on why I believe that the biggest problem that the Obama Administration and other world leaders will be facing is a strengthening Dollar, I suggest a review of my May 2009, report “Safe Haven Status of U.S. Delays Recovery”.  For more on why I believe that the U.S. is currently in a Super Bear market and why I expect it to last until 2015 at the earliest go to www.bearmarkettracker.com.  Investors should remain cautious and have their assets in 80% cash or equivalents such as short- term U.S. treasury securities.