Behavior of Industrial Commodities Is for Real

Most investors or commentators are fixated on the behavior of crude and gold (and perhaps to a lesser extent silver) as indicators of inflation and / or world growth. However, given the ease of access with which to trade oil and gold we suspect that much of the movement (or lack thereof) in the prices is due to speculation and perhaps manipulation by greater forces. With respect to commodity market analysis, we prefer to look at those commodities that are not so subject to speculation and manipulation.

We have found that pure industrial commodities give more of a true indication of what is happening to world growth(albeit what is likely to happen). As of late the action of industrial commodities suggests something is happening because prices of lead, copper, cotton, and nickel are creeping higher. All four of these key industrial commodities remain in healthy up trends with a series of higher highs and higher lows. The action of these commodities suggests that either world growth or inflation or some combination of the two is for real.

In addition to the behaviour of the four industrial commodities themselves is the confirming behaviour of relative trends in equity markets. One of our favourite confirming indicators for the behaviour of industrial commodities is the performance of steel stocks relative to the broad stock market. The graph below confirms the action of industrial commodities and suggests that yes, the world is pulling out of the worst recession since the 1930s.

Watch the chart above closely, we have found that it leads even the behaviour of Dr Copper. If the charts above are anything to go by, we have already seen the bottom of the commodity market.

Commodities should form part of any "balanced" long term portfolio, of course the trick is to figure out just which commodities to invest in.

Disclaimer: Long SLX