The fundamental components that brought gold, silver, oil and many other commodities to record levels in recent months are still intact. Even from a technical standpoint the bull run in commodities is still intact. If you think the run is over, you are mistaken.

Yes, a correction was long overdue. This correction is actually very bullish for commodities in the longer term as it confirms we have not yet peaked and are simply building higher support levels. If you look at the charts for gold and silver, you will notice higher highs and higher lows in the past 6 months. Despite this viscous correction, particularly in commodities, the trend remains up.

This is not the end of the commodity bull market...not even close

Think back to our past reports which have explained exactly how this bull market in commodities will end. Every multi-year bull market ends in the same way. A parabolic rise and a degree of mania surrounds the investment; be it paper assets, commodities or even real estate, which ultimately and predictably leads to a crash. We are not even close to being in the mania stage. Less than two percent of world investments are estimated to be in precious metals; hardly enough to even call it a popular investment - never mind in the mania stage or a bubble.

Many equities, especially the high risk equities on the TSX Venture and Russell Index, have taken a beating in recent weeks as aversion to risk has increased lately. Many companies are off from previous highs as the market decides what to make of the impending unwinding of QE2 and recent uncertainty in global markets.

The Fed is Stuck Between a Rock and a Hard Place

The world currency is being devalued. As inflation spreads from Main St. America to the villages and cities of countries around the world, commodities will rise much further than they already have over the past two years.

The only way commodities don't rise is if the Federal Reserve stops printing money or raises interest rates (significantly). If the Fed did those two things, and let the chips fall where they may, the United States would enter a recession far worse (and much longer) than 2008.

The Federal Reserve cannot and will not do this. When you hear QE2, think Treasury Market. The Fed is the biggest player in the US Treasury Market and has been a net buyer for many months. If the Fed stops printing money, or in other words, stops buying Treasury Bonds, interest rates on US debt will rise and the US will quickly be facing default. If the Fed voluntarily raises interest rates to reign in inflation, it will choke out what little economic recovery we have and the same result will occur. For these reasons, we believe inflation will reign supreme for the next few years.

Just this past week the US sold $72 billion of Treasury Notes at auctions! On Wednesday, May 11th 2011, $24 billion of US debt was auctioned off by the US Treasury. As central banks and other foreign buyers attempted to undercut prices, showing reduced demand or unwillingness to buy Treasury Bonds at current rates, the Fed stepped in. The Fed did what it has become accustomed to doing. It supported the market with falsified demand - artificially holding interest rates low. The Fed bought $7.68 billion of Treasuries maturing November 2016 through April 2018. Almost 30% of the buying that day came from the Fed.

Who will buy these Treasury Bonds and keep demand humming along for US debt when the Fed concludes its $600 billion monetary stimulus next month?

Has Obama's policies changed? Has there been news that this year's deficit will be cut in half? Will the US not have to issue hundreds of billions and even trillions of debt to foreign central banks just to sustain its own spending programs?

You know the answer to these questions. The Fed will find a way to support the Treasury Market because if it doesn't, these buyers will demand higher rates and the interest alone on the US deficit will force it into default. The only reason the Fed can support this manipulated market without countries turning their backs on the US is because it controls the global reserve currency. If there were to be ongoing weakness in the US Treasury Market it would only fuel China and Russia's ambitions for a debasement of the US dollar as the world currency.

The threat that the US dollar could be removed as the world currency is a serious issue that would fundamentally change the entire international investing market; not to mention Americans' standard of living.

These are no longer distant grumblings. Real initiatives and plans are being implemented to make this a reality not only in our lifetime, but in the near future.

Many investors wonder just how long the US can keep printing dollars...

The real question investors should be pondering is; How long can the US Dollar continue to be the world currency as failed policies and out of control spending continue?

What Is At Stake

The US dollar is the global reserve currency. In a nutshell, this means gold and all tradable commodities are purchased in US dollars. So before purchasing crude oil, a country must convert its own currency into USD to make that purchase. Naturally, there are conversion costs that must be absorbed by the purchaser. It gives the US a very clear and defining advantage.

The US is the only country in the world which can print unlimited dollars (the world's currency) and run up high deficits of the USD. The United States has been taking blatant advantage of this and abusing its control over the world currency for years. Many countries, but namely China and Russia, have seen enough.

On March 24, 2009 the governor of China's central bank, Zhou Xiaochuan wrote a paper calling for serious changes in the global financial system and the possibility of creating a single currency which would replace the dollar as the global standard.

Zhou's resolution was to reform the international monetary system by creating, "an international currency reserve that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies." This forceful statement was backed up by Russia.

In late 2010, China and Russia agreed to have their currencies trade against each other in spot inter-bank markets.

Chinese officials released a statement that stated, the motive is to "promote the bilateral trade between China and Russia, facilitate the cross-border trade settlement of [the Yuan], and meet the needs of economic entities to reduce the conversion cost."


The cross border or 'international' trade of the Yuan. That is the clear message here. China, nor its Yuan, will be confined to its borders.


China and Russia have been making gradual moves away from trading in the US dollar for years. In the past, if China wanted to buy oil from Russia it had to do so in US dollars. Not anymore. Trade between these two countries stood at roughly $40 billion last year and is expected to only increase as China becomes the largest consumer of oil in the world. The International Energy Agency, has reported that China is already the largest consumer of energy, however the U.S. is still the largest consumer of oil. This is not to be overlooked, because as China becomes the largest consumer of oil, the most widely traded commodity amongst developed nations, a major bargaining chip of power will be permanently shifted into their control. Russia has taken the first step. Will the rest of Asia follow and begin trading in Yuan?

China is also promoting the use of the Yuan as a trade settlement currency throughout Asia. Recently, it allowed its currency to trade against the Malaysian ringgit. Just like the deal with Russia, the purpose of the agreement with Malaysia was to "promote bilateral trade between China and Malaysia and facilitate using the Yuan to settle cross-border trade."

Our team is always checking in on China as we believe it will be the country which ultimately leads the global community away from the US dollar. It has been very intelligent in its efforts thus far. As a proud owner of more than $1.1 trillion US debt, China has been eagerly reducing its exposure to the dollar. It has done this by buying hard assets and stakes in natural resource deposits across the globe (in US dollars of course). This trend sparked the commodity bull market.

Many people don't actually know, or understand, why the United States can affect other countries' inflation rates. It is because for the past decade, on average, 2/3 of global reserves have been backed by USD.

Official Foreign Exchange Reserves

In 1999 the US Dollar was responsible for 70.9% of foreign exchange reserves.
In 2000 70.5%.
In 2001 70.7%.
In 2002 66.5%.
In 2003 65.8%.
In 2004 65.9% .
In 2005 66.4%.
In 2006 65.7%.
In 2007 64.1%.
In 2008 64.1%.
In 2009 62.1%.
In 2010 61.4%.

This is the real decline of the US dollar. These are the facts which back up the reality that the international community is beginning to lose faith in the dollar and the policies of its central bank(the Federal Reserve). With that stated, you better believe the Federal Reserve is not going down without a fight. It will do everything in its power to maintain the US dollar as the world's reserve currency. We are all witness to its desperation and tactics.

As the markets battle emotions leading up to the conclusion of QE2, our team continues to believe strongly in the inflationary factors driving commodities and commodity based equities we are so heavily invested in.

Great value opportunities in the commodity sector are beginning to pop up all around us. In short order, the buying opportunity of the year will arrive. Be ready and don't be fooled into believing this is the end of the commodity bull market.

All the best with your investments,