Long-Term Trends vs. Short-Term Corrections


“The dollar, yen and euro are all headed to zero…eventually,” our colleague Chris Mayer predicts. “But there is a journey of some length between here and there. In the between, you’ll be glad you own real assets like oil, natural gas and gold.”

But in the between, you’ll also be sorry you own real assets like oil, natural gas and gold. That’s simply the nature of financial markets. Even in bull markets, misery pays a visit periodically.

The recent history of natural gas prices makes the point. If you invested in natural gas at the beginning of 1999, you’re sitting on a plump 150% gain – or more than five times what the S&P 500 Index gained over the same time frame.

But if you happened to establish your long-term, inflation-hedging position in natural gas in late 2005, just after Hurricane Katrina caused nat gas prices to spike above $15/mcf, you’re nursing a painful 69% loss…five years later!

More recently, misery paid a visit to the oil market. After topping out at $145/barrel on Bastille Day 2008, the oil price plummeted more than $100 to $34/barrel. And the oil price still remains nearly 40% below its all-time high. But this monstrous collapse occurred in the context of an equally monstrous bull market. If instead of investing in oil in the summer of 2008 you had invested in oil in the summer of 1998, you would have watched your investment increase 8-fold!

So what’s the point?

Simply that large, long-term trends sometimes succumb to large, short- term corrections. As the gold price soared, for example, from $253 an ounce in 1999 to $1,367 today, it suffered a number of large, short- term corrections. Twelve times during this long bull market, the gold price retreated 10% or more. Twice, the gold price tumbled more than 20%.

In a bull market, such setbacks are buying opportunities. In bear markets, every price is a selling opportunity.

So what should we make of the current volatility in the commodity markets. Grain prices are soaring, as is the oil price. But at the same time, the gold price is languishing and the silver price is tanking.

Is the commodity bull market ending because gold and silver are going nowhere, or is the commodity bull market simply fanning out and/or taking a breather?

Let the reader decide. But before deciding, let the reader consider that each piece of paper currency that falls off a printing press costs the issuing government about one cent each to produce. By contrast, bushels of wheat and ounces of platinum demand much larger investments…and also require the cooperation of weather or geology.

If all goes well, massive investment combined with favorable conditions yields a bit of grain or a speck of precious metal. If not, not. That’s why precious metals are precious…and why generations of mankind have begged the Lord above to “give us our daily bread.”

In short, hard assets are precious because they are either rare or essential…or both. And hard assets become all the more essential to the extent that central bankers debase the currencies they purport to protect.


Eric Fry,
For Daily Reckoning Australia

Editor’s Notes: Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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