Commodity Rally Remains Robust

It all seems so easy when things go your way but then almost without warning they turn on you with no apparent warning! Anyway getting straight to the point – has anything changed over the last few days to bring into question the rally in commodities and particularly the breakout of the CRB over the last few weeks?

Let us look at commodities from three perspectives:

1. Using our own proprietary commodity index.
2. The performance of US Treasuries TIP vs. non TIP.
3. Commodity currencies relative to the USD.

From these we should get a fair idea of any cracks appearing in the commodity “trade.”

We constructed our own proprietary commodity index using five critically important commodities which are not constituents of any of the popular commodity indices and accordingly are not so subject to speculative trade. These commodities are polyethylene, wool, coal, rubber, and pulp. Each commodity has an equal weight in the index. From the chart below there does not appear to be a problem in the uptrend.

From an inflation expectation perspective it appears that inflation protected 10 year US Treasuries are on the verge of breaking to a multi-week high against conventional 10 year US Treasuries. This suggests that inflationary expectations are rising rather than falling which can only be supportive of more upside in commodities over the coming weeks or months.

If we create an index of the Aussie, Kiwi, Rouble, Rand, and Real against the USD we get a good picture of how commodity currencies are performing. Commodity currencies are generally leading indicators for the behaviour of commodities themselves. There does not appear to be any loss of momentum in commodity currencies relative to the USD (or the JPY for that matter).

From the charts above we conclude that the weakness we witnessed over the last three days in the CRB and other board based commodity indices such as the Rogers, DJAIG, and Goldman Sachs composites was entirely within the confines of normal volatility (some may use the term profit taking). Until we see evidence to the contrary (i.e. breakdowns in the three indices above) we continue to be positioned for more upside in commodities… and of course continue to keep a rabbit’s tail in our back pockets.

Disclosure: Long DBC, SLV, TBT.

Comments

[Mad Hedge Fund Trader]

mzx Those of you searching for the “newnormal” better take a close look at the China National Offshore OilCompany’s (CNOC) efforts to top Exxon Mobil’s (XOM) $4 billion bid fordevelopment rights to a giant new field off West Africa. This is onlythe latest chapter in a global bidding war for essential resourcesthey, and we, need. Long gone is the day when the Standard Oil Companyonly needed to deliver King Saud a new Cadillac every year to assurerights to his kingdom’s oil supplies, even though it often had to betowed by teams of camels, as there was no refining capacity yet on thepeninsula. Decades later, I was part of a SWAT team at Morgan Stanleywhose schmoozing kept the crude flowing and the cash surplusesrecycling. Having grown up in the desert near Indio, California, I wasthe only one in the company who actually liked caravanning out into thedesert to scoop up cooked rice with my fingers off of giant brassplatters, and guzzle illicit Johnny Walker Red, said to be smuggled inby a wayward member of the royal family. I never did get used to thesheep brains, though. But I digress. To the current generation of oiltraders, I might as well be talking about the Pax Romana than the PaxAmericana, which is now equally ancient history. The hard truth is thatthey are out there bidding against the new 800 pound gorilla in themarket, as are others for coal, iron ore, copper, gold, silver, wheat,corn, soybeans, and myriad other essentials. If you have any doubtsabout China’s acquisitive determination, look at the chart belowshowing that the Middle Kingdom’s outbound direct investment isoutstripping inbound investment for the first time. Will the PebbleBeach Golf Course next? For you and I, this means we can count on theprice of everything to go up in the future, a lot. Keep food,commodity, and energy ETF’s permanently on your radar, like thePowerShares agricultural (DBA), the Rogers International Commodities(RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

2009 Oct 27 11:04 AM