John Mauldin's thoughts on the ongoing bull market in commodities--Pro Trader

Just a few quick thoughts about the drop in commodity prices we saw this week. First, it was about time. Gold and other commodities went too far, too fast in a largely speculative frenzy. A correction was overdue. Gold saw the largest one-day drop in 28 years, since the bubble days of the '80s. When everyone is on the same side of the boat, the boat is likely to tip over. Gold still probably has some room to fall before it catches support. But I seriously doubt that we have seen the highs for gold against a whole host of paper currencies.

A few weeks ago, I sent you an article by David Galland on why the gold stocks have not kept up with gold. For those of you who want to put some of your assets into gold, I would use this pullback to get positioned. If you have not yet read it, click on the following link and see why David thinks gold stocks are getting ready to rise. http://www.frontlinethoughts.com/txt/jmotb022508.htm

But we could continue to see pull-backs in other commodities. China is getting serious about curbing inflation, and that means they need to slow down their economy, raise rates, and allow the yuan to rise. They increased the requirements for bank margins this week. Along with a slowing US consumer and generally slower US economy, which will be felt worldwide, we could see commodity prices come under pressure before a growing world increases demand.

Part of the reason is that the dollar is no longer a one-way play. A falling dollar may no longer lead inevitably to higher oil and commodity prices.

And Greg Weldon makes a strong case that oil prices are set to come down from their lofty highs. Demand is softening and supplies are rising. Gasoline supplies are at a multi-decade high, and the number of days of supply is rising as well. This is quite bearish for oil.

It also means that the inflation caused by food and energy might actually subside, giving the Fed cover to lower rates again at their next meeting, which I think they will do.

Falling demand is what you should expect in a recession, especially with prices as high as they are.

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