A Melman Minute By: Leonard Melman   September 03, 2008   While there is still a great deal of debate whether the recent commodity price corrections constitute a complete reversal of the long-term upward price movements or are instead important corrections inside ongoing bull markets, there is little debate that they are having a pronounced effect on both mass psychology and on market results.   The number of commentators who have been willing to take a stand that the "commodity bubble has burst" is on the rise and the public is truly enjoying the spectacle of falling gasoline, heating oil and natural gas prices, along with the assumption that future price inflation will diminish as raw material prices decline.  This psychology has led to a strengthening of the U.S. Dollar as well as the expectation that U.S. monetary authorities will be able to lower interest rates further, now that the fear of rising inflation is subsiding, at least for the moment.   Most of the public optimism relates to the petroleum complex and a recent article in the Globe & Mail's "Report on Business" section is typical of what we have been reading of late.  In a story carrying the headline, "Oil's plunge hailed as turning point", we are informed that, "...After a brief, hurricane-related rally last week, slumping crude prices continued their summer-long retreat yesterday, leading to a broad sell-off in commodities as traders focused on a weakened global economy and a stronger U.S. Dollar...dealing the TSX Composite a 475.51 point decline, its largest since January.    (Note:  this morning the TSX continued its plunge, falling by almost 300 points in the first few hours of trading.)   Optimism regarding a major turn in the trends has become so widespread that one newsletter writer, Stephen Schork, was quoted as saying, "...I think the bubble has clearly burst."  He also told the newspaper that, "...As long as the US Dollar continues to strengthen, oil prices could skid below (all prices US$) $100 per barrel and approach the $70 to $80 range of last fall."    Another impact of the commodity price declines has been heavy losses in many commodity trading funds and one of the most important, Ospraie Fund Ltd., which had assets of almost $3 billion in August,  just announced they were shutting down their flagship fund after sustaining losses of almost 40% this year.   It is also impossible to ignore the damage done to mining share quotes by these declines and the most widely-watched mining share index, the XAU, clearly shows the extent of the damage as it has fallen to a new yearly low this morning near the 132 level.     It is important to put these recent moves into long-term context and for that purpose we are publishing two of our favourite multi-decade charts, those of crude oil and the U.S. Dollar (via the DX Index).  In each case, it can be seen that the long-term trends remain intact, despite the selling in crude and buying in the Dollar Index.     While the decline from $147 to the present $107 is indeed serious, it can be readily seen that the major long-term move remains intact as the chart clearly shows a pattern of 'rising bottoms' including $11 per barrel in 1998, $18.00 in 2001 and $50 in 2006.  In fact, it is the last of these declines which closely mirrors the present activity.  In that instance, in the midst of optimism that the preceding terrible rise in crude from $40 to almost $80 was over, a new and powerful bull rally emerged.     The appearance of the Dollar Index (DX) chart is similar, if in reverse.  After falling sharply from early 2002 through late 2004, the DX rallied from 80 to 92 and once again we heard how the Dollar was returning to strength.  However, as with crude, that rally faded, the DX plunged like a stone, and new lows were set and re-set on a regular basis.   Two of the oldest and most perverse market saws are that bull markets want to rally with as few participants on board as possible while bear markets want to carry as many die-hard bulls to their doom as possible, and the most recent market moves are testimony regarding the truth of those axioms.  In the case of crude, virtually all the bulls are being driven to the sidelines while in the case of the DX, many previously sidelined bulls are being encouraged to re-enter the market and take advantage of the U.S. Dollar's next sustained rise.   We shall see.   As of 8:30 AM, the precious metals were lower with gold trading near $800, silver back down to $12.74 and platinum once again under the $1,400 level while the base metals are relatively unchanged on balance.  The Dow Industrials reversed earlier gains to now post a loss of about 90 points while the TSX, as noted, is off by just under 300.  Crude is down by about $2.00 to the $107 level while the DX has crossed above the 78 barrier for the first time in many weeks.   Investors should be aware that this is a period of high risk, but also may be a time of high opportunity.  The markets will likely let us know about their 'intentions' in due course.   We would also add the caution that no investment decisions should be made without prior consultation with registered investment professionals.       ◄  Previous Minute                                                                                                         Next Minute  ►
		DISCLAIMER The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed.  Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only. Any investment decisions should be made only following consultation with registered investment professionals.