Firming Commodity Prices Signal Economic Stabilization

Cyclical commodity prices such as oil and industrial metals have been in firming trend, signaling that the global economy is stabilizing and the government’s massive reflation effort is beginning to have its intended effect.

It is hard to imagine that the astounding amount of money the U.S. is throwing at the credit crisis won’t lead to an inflation problem, probably starting within the next 12 to 24 months. Commodity investments are a natural defense against this eventual outcome, and should serve as an effective diversification tool over time in a balanced investment portfolio.

In the fourth quarter of 2008 and earlier in the first quarter of 2009, amid fears surrounding the financial crisis and the deep downdraft in economic activity, gold dramatically outperformed the broader commodity complex. While on a longer term basis the case for owning gold as an insurance policy against paper money debasement is very much intact, non-monetary commodities appear to have begun in March a period of outperformance versus gold.

Over the past five years, the ratio of the price of the S&P 500 to the price of the (SPY) Dow Jones-AIG Commodity Index, which holds a diversified basket of commodities, has ranged from a low of 5.4 to a high of 9.1. The current ratio of 7.4, which is approximately in the middle of this range, suggests that neither asset class is at an extreme valuation relative to the other.

Comments

[schlumpf:]

Economic stabilization? Where?

Apr 19 03:56 PM

[Mad Hedge F...:]

It's the new one way trade.Traders looking for the Next Big Play are keeping a laser like focus on two key commodities. Chinese stockpiling prompted copper to break out of its recent trading range to the upside to $2.26, taking lead producer Freeport McMoran (FCX) up huge as well. Crude rose to a high of $55 These impressive moves happened during a week when global equity markets were struggling to rise. This suggests that the bulk of the world’s growth will be in emerging economies, and that the next round of commodity buying will be even more ferocious than the last. Since I believe that the future is all about the ascent of hard assets over paper ones, this is music to my ears.

Apr 19 07:37 PM

[willynill:]

Is paladium a play now after today's 60 Minutes story on "cold water fusion"?

Apr 19 08:35 PM

[Steven Hansen:]

for many commodities, the price fall went below the cost of mining and refining. this condition will only remain for a short period until mines start mothballing until prices rise. this reduces supply and stabilizes the price. so price stabilization or rise during a recession usually is indicative only of a optimization of supply.

i would be careful about interpreting what is going on inside of china - and for sure it is not indicative of emerging economies. china is still an exporting country. they are not sharing their stimulus with the rest of asia.

Apr 19 09:40 PM

[John Polomny:]

There is a worldwide money pump going on of course commodities are going to rally. The thing that worries me is what happens when the FED has to eventually turn of the liquidity when inflation returns in the reported numbers and begins affecting people. I like the analogy I heard from a pundit. When a tiger (deflation) is chasing you do not worry about the python (inflation) you are running towards.

Apr 20 01:22 AM

[Rohan C. Pease:]

Base metals are indicating that the economic cycle has restarted, the commodity cycle will begin again, look to steel prices for confirmation as well as for increases in the BDI. 2008 was a year were the global economy hit the restart button, the stimulus effects will begin to be felt.

Apr 20 03:47 PM

[Rohan C. Pease:]

John, I like the inflation/deflation analogy, it truly is a lesser of two evils.

Apr 20 04:02 PM

[prudentinve...:]

"Firming Commodity Prices Signal Economic Stabilization"

or, perhaps, a mpre appropriate title is:

"Firming Commodity Prices Signal Massive Pent-Up Inflation"

Have you looked at a 10-year chart of copper prices, or nickel prices? Please take a look, compare them with the "PPI", and tell us if it is not just massive inflation.

Apr 21 06:42 AM