Ay Carumba! Commodities Suffer Biggest Drop in 25 Years

Listen for the weeping and gnashing of teeth on the trading floors. I'll let Bloomberg break the bad news...

Commodities, Led by Metals, Face Biggest Weekly Drop Since 1980

May 19 (Bloomberg) -- Commodity prices headed for their biggest weekly drop in more than 25 years, led by metals and grains, on speculation that higher interest rates will erode the appeal of copper, gold and silver as alternative investments.

...

"The speculators are piling out of the metals,'' said James Vail, who manages $700 million in natural-resource stocks at ING Investments LLC in New York. "There's been so much money made in this sector that people are trying to protect themselves. There was skepticism on the upside, and now there's panic on the downside.''

...

"Because of the volatility in all of the markets in the last week, people are beginning to be concerned about slowing economic growth and inflation picking up,'' said Stephen Briggs, an analyst at Societe Generale in London. "That's not a good combination, notably for industrial metals.''

Well, that all sounds pretty bad. Shall we look at a weekly chart of gold, then?

The horizontal lines are called "Fibonacci Retracements," which give technical levels for the likely extent of pullbacks. That top one the weekly gold chart is sitting on is a 25% Fib retracement. So, gold's next rally could start right here.

Or, if we had a 38% Fib retracement, it could go down to 608 or so.

Or a 50% Fib retracement -- still allowable in a bull market -- would be at 570.90.

If gold gets to $570.90, thank your lucky stars and back up the truck, because it's time to load up with gold.

But we probably won't be that lucky. We might not make it to a 38% retracement -- and if we did, I'd thank my lucky stars for the opportunity.

After all, look at the chart again. Despite this week's sell-off, gold hasn't even broken its recent uptrend, never mind longer-term uptrends that are even stronger.

Sure, all bull markets become bubbles eventually. But this commodity bull market is only five years old; a normal historical cycle should give us another decade to go, AT LEAST. And when you consider that it comes after a brutal, 20-year bear market in commodities, this one should have much further to run.

Then figure in all the demand for commodities like copper, gold and oil from China and India -- demand that is only getting stronger.

And then take the greenback... please. The fundamentals of the U.S. dollar are just terrible. The Fed manufactured a bounce in the last couple days with some doubletalk, but it's fast running out of tricks.

Finally, I'd much rather make long-term investments in a market (commodities) that gets a bit frothy once in a while than invest in some of the Hindenburgs that Wall Street is passing off as "Dow leaders" these days. The weekly chart of the Dow looks bad. You can see the problem even more clearly in the Dow's daily chart, so let's look at that...

Yeah, that's what I'd call breaking an uptrend. If the Dow gets back to 11,330, I'd short the heck out of it.

And put that money in gold or silver. When the market really craps out, those should hold their value.

By the way, I think silver is looking more bullish than gold. Maybe that will lead when the bounce comes.

Check out my new gold and energy blog at MoneyAndMarkets.com