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The Long-Term Case for Commodities: “When Push Comes to Shove, They’re Going to Print Money”

Aaron Task
Editor in Chief
Daily Ticker

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Gold, oil, copper and a host of other commodities were heading lower Monday morning, continuing a recent pattern that has some wondering if the commodity "super-cycle" has come to an end.

After falling 13% in 2011, the Dow Jones-UBS Commodity Index entered this week at its lowest level since September 2010 amid concern about slowing global growth hurting demand. In addition, the dollar has benefited from Europe's ongoing debt crisis, resulting in lower prices for hard assets, notably gold and silver.

More weakness is likely in the short-term, in part due to seasonal factors as well as the slowdown of the economy, says Frank Holmes, CEO and CIO of U.S. Global Investors. Crude, for example, could "easily" fall to as low as $80 mid-summer he says, predicting continued near-term weakness for gold as well.

But Holmes -- a longtime, long-term bull on resource assets -- says additional short-term weakness will prove to be a long-term buying opportunity for one big reason: "When push comes to shove, they're going to print money."

As has been the case for many years, Holmes says commodities will continue to benefit from the easy money policies of central bankers here and abroad. While the Federal Reserve gets the headlines, he notes central banks in emerging markets have switched back to stimulus after being in tightening mode a year ago.

"Long term there's no fortitude, no courage for governments to turn around and be financially disciplined," he says, referring not just to the U.S. but Europe, Japan and England as well.

Because global central banks remain highly accommodating, interest rates are negative in many of the world's leading economies, meaning inflation is above short-term interest rates.

Historically speaking, gold is a good buy unless and until interest rates are 2% above the inflation rate, Holmes says. With CPI up 2.7% on a year-over-year basis, that would mean the fed funds rate would have to approach 5% before gold becomes uneconomical.

"If I start seeing interest rates rise 2% above CPI in the 7 biggest GDPs in the world, that would be huge turning point," he says. Instead, policy making is going in the opposite direction, toward more stimulus -- of both the monetary and fiscal varieties.

In sum, Holmes believes the commodity "super cycle" remains very much intact and compares the recent downdraft to the many setbacks -- including the 1987 crash --- stocks suffered during their historic rally from 1982 to 2000.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com