Is the bull market over for commodities?

That all depends on how successful global central banks can engineer a new round of inflation as an environment of accelerated deflation or falling prices continues to plague world markets. Make no mistake about it, this is deflation.

Amid a surging dollar since July commodities have tanked more than 25% with crude oil prices about to post their worst weekly performance in four years. Even gold, a sanctuary in uncertain economic times, has faltered this week despite five bank failures across Europe.

Right now deflation is winning as global economic growth slows or, in some cases, contracts. The dollar has emerged as King. But over the next several months I think global central banks will cut lending rates, perhaps even aggressively to stimulate growth and, invariably, inflation. It’s literally “Inflate or Die” for the world’s central banks, including the Fed.

Rapidly declining prices are now widespread in housing, credit, stocks and commodities. The last time all major asset classes were purged this hard was back in the 1930s. The only major asset class still gaining value is Treasury bonds, up more than 13% year-over-year.

Global markets have placed new bets since July as we’ve transitioned from inflation to deflation for the first time since 2001. It’s been a huge reversal with hard assets like oil, the grains and industrial metals plunging, foreign currencies tumbling and stocks markets worldwide collapsing.

What’s happening now is the big reversal of “easy money,” or the death of the carry-trade, which relied on cheap funding costs and leverage. The entire global marketplace is now unwinding leverage and the resultant shift is highly deflationary as risk is aggressively reduced coupled with far less liquidity.

Is there any good news?

Assuming central banks print credit and do everything they can to contain deflation and support the financial system, then yes, markets will find a bottom. But I’m afraid we won’t see a bottom for at least another 3-6 months because this train is running fast, cutting economic growth and instilling fear among consumers. It’s also an environment that is not supportive of corporate earnings.

Remain highly liquid, maintain low equity market exposure and keep those reverse-index hedges. Also, don’t give up on gold. We’re all going to pay for this spectacular expansion of credit over the next five years – and that means high inflation.

Enjoy your weekend. See you on Monday.