As you know, I am not convinced that gold, silver and other commodities are ready to fully break out to the upside in the short term.

In fact, judging by the wicked 13% decline in oil prices in the last three weeks, I’d say deflation still has the upper hand.

Ditto for the 12.6% decline in the price of soybeans over the last month. Or the 8% decline in cocoa prices …

Or the bigger 44% decline in the price of coffee over the past 14 months … the 25% decline in sugar prices … the 34% decline in orange juice prices … and the 17% decline in economically sensitive copper prices.

Mind you, all of this is happening despite QE III and unlimited money-printing from the Federal Reserve and the European Central Bank. Not to mention more money-printing from the Bank of England, the Bank of Japan, and even the People’s Bank of China.

If you just arrived from another planet and took a look at all that money-printing, you’d think most, if not all, hard asset prices would be at new record highs.

But, as I just showed you, not only are they not at record highs, most of them are DOWN considerably.

Yes, I know gold and silver prices have been creeping up. But gold is still some $121 BELOW its previous record high. Silver is roughly 30% below its previous high. And while all this money-printing is going on!

So what gives? Why are investors so wildly bullish on commodities right now, especially gold and silver?

What the heck is really going on?

Here are my answers:

First, investors are right. Almost all commodities will explode to new record highs. Eventually.

Gold to over $5,000. Silver to over $125. Food prices to double, triple and even quadruple their current levels. Oil prices to soar to over $150 a barrel. Gas prices of $5 a gallon. And more.

All of this will indeed happen. I have always maintained that view.

But second, the main reasons are not as obvious as they might seem. You see, sometimes it takes more than money-printing to inflate asset prices.

To understand why, let’s go back in time for a few minutes. When the commodities boom first began, largely in late 1999, almost everyone was bearish commodities and bullish stocks and bonds.

Then the tech wreck came. Then 9/11. And the Federal Reserve responded with massive money-printing.

Our government simultaneously went to war, spending hundreds of billions of dollars.

Those hundreds of billions of dollars … plus the initial Fed money-printing … were enough to kick off the first phase of the commodities bull market.

But it wasn’t enough to keep propelling commodities higher and higher in a non-stop fashion. That’s because one very important ingredient was still intact: Most of the world still had confidence in the U.S. government. In Washington.

Confidence that the U.S. government would be successful in keeping us safe from terrorism. Confidence that, between Washington and the Federal Reserve, the economy could be rescued from the ravages of the tech wreck. And more.

And indeed, stocks did recover. Confidence in the government largely boomed. The best gauge: The rip-roaring bull market in U.S. Treasury bonds.

That’s why I maintain my view that until confidence in the U.S. government (and in Europe’s government) completely collapses …

Commodity prices in general are not about to take off to the moon, no matter how much money-printing is going on.

You may disagree with me. After all, we all know about Occupy Wall Street … we are all angry at investment bankers and the government and how it seems like they are cahoots with each other …

But the fact of the matter is that confidence is not fully shattered yet.

If it were, U.S. Treasury bond prices would be collapsing … and money would be flowing from bonds (confidence in government) into commodities (no confidence in government) en masse …

Setting off the next spectacular stage of the biggest commodity bull market, ever.

That time is coming. But it is not here yet.

So how will we know when it’s here; when confidence in government is completely shattered, when the next phase of the commodity bull market really gets started?

I’ll tell you what I’m watching:

First, the U.S. Treasury bond market. When Treasury prices really start to show signs of cracking, take it as your cue that confidence in Washington is about to go completely and utterly down the tubes.

Second, the U.S. dollar itself. This used to be the primary leading indicator you wanted to keep an eye on. But the dollar is now being buffeted by so many different cross-currents, especially Europe’s crisis, that it is not as reliable an indicator as it was in the first phase of the commodity bull market.

Nevertheless, the key line in the sand for me is the Dollar Index’s past record low of 72.696 on May 2, 2011. As long as it continues to hold, the next big move up in commodities is not here.

Third, I am of course watching gold prices closely. The recent rally isn’t enough to cut the mustard. Gold must close above the $1,823 level to give me a clear-cut buy signal.

Do we need all three of the above signals? No. But I’d like to see at least two of them before I can say the next phase of the commodity bull market is here.

I may be one of the only ones out there who’s not rip-roaring bullish on commodities right now, but that’s OK. It reminds me of all the other times my forecast differed and, yet, I was proven right.

Best wishes,

Larry

P.S. For more in-depth analysis of today’s rapidly changing world and markets, including very specific entry and exit points for many more recommendations, consider a membership to my Real Wealth Report.

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Larry Edelson has over 34 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Power Portfolio provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.

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