Will 2011 See a Boom in Commodities?

Further, more capital and more players will add momentum to speculative price movements. Think bubbles and frothy price action. Pay careful attention to any regulatory changes out of the CFTC on position limits or reporting requirements as this could cause large, short-term market disruptions as large market participants are forced to change tactics. And expect the equity industry to get jealous and create a host of new futures based, directional ETFs. These new “investors” will add fuel to the fire when it comes to runaway price moves in instruments like oil, silver and copper.

2) Inflation is not just over the horizon, it’s already here.CPI and PPI may not reflect it, but the future price of everything from Treasuries to soybeans are telling us that Ben Bernanke’s “inflate or bust” strategy will be very successful. History is such a great teacher, yet we forget its hard taught lessons faster than the career of a JerseyShore cast member. Centrally planned economies have horrendous track records when in comes to moderating inflation or providing smooth and consistent growth. Boom and bust ring any bells?

3) Gold will continue to appreciate.In the words of Dennis Gartman, “be a buyer of things moving from the lower left to the upper right”. One caveat: the trade is based on the thesis that the U.S. and other developed economies will not clean up their fiscal mess. If the dollar catches a bid due to sound fundamentals, not risk aversion, gold will see a correction. Remember, gold represents a store of value and a currency of last resort. If the only other reserve currency, the U.S. dollar, strengthens through true economic production and government austerity then the value and perceived safety of gold will dwindle.  

4) Volatility is here to stay. PIMCO’s Mohammed El-Erian and Bill Gross coined the phrase, “The New Normal,” so welcome to it. Call it a byproduct of information transparency or a high dependence on global economics, or simply more money chasing fewer items; volatility is here and it is not going anywhere. The price of volatility on the S&P 500 makes one question the argument, but a quick look at a daily chart of silver might be more convincing. The thought is simple: The volatility decrease in the equity market is a direct result of capital outflows. Eventually, when the hum of government stimulus support ends, investors will see just how volatile the equity market can be.

5) Alternatives outperform.Hedge fund strategies such as managed futures will outperform in 2011. These programs have under-performed in the last two years, but expect this coming year to offer the extreme volatility environment in which these types of investments thrive. Equities have had their fun. Looking at the run from the March 2009 lows one should be very happy with current valuations given the fundamental backdrop. Remember, we are near two-year highs in most major indexes while real unemployment hovers around 17%, more than one in five homeowners are under water on their mortgages, and consumer credit is contracting at historic rates.