Commodities Set to Break Out: A Look at the Evidence

Commodity markets have been somewhat frustrating as of late with the major indices (CRB, DJUBS, GSG, Rogers Int.) relatively little changed since the start of June. In fact the broad based ETF that we use to gain exposure to commodities in general is trading exactly where it was on June 1! So much for our bullish call on commodities. This raises the question – are we wrong? Are commodities about to fall into a crumpled worthless heap? Have our positions put the blinkers on us? We can only go by what we see in the charts and below we will present some of the evidence that supports our bullish view on commodities. Of course you may well beg to differ, if you do please let us know what we are missing.

Click images to enlarge

We decided to use platinum because if we talked about gold (in USD terms) it would be stating the rather obvious. Platinum is trading at a multi-week high. Silver is only a few percents from breaking to a high for the year, and gold is now at a multi-week high in AUD terms. Precious metals have historically led the broad commodity group into bull markets. We have no reason to believe that this time it will be any different.

The market may well be pricing little in the way of inflation into world economies, but it is not the absolute level that is important - rather the rate of change in those expectations. With TIP more or less at a multi-week high against the US 10-year, inflation expectations are on the rise. Correct us if we are wrong but being short commodities in a rising inflationary environment is perhaps the quickest way to the poor house!

Equity prices are based on expectations about the future, as such they are really “future” prices. Anyway equity markets often are leading indicators for what happens in commodity markets. Right now commodity sensitive equities (basic materials) are clearly outperforming the general market on a global basis. Equities wouldn’t be doing this if there was an expectation that commodities were about to fall into the abyss due to whatever forces.

And last but not least the good old Baltic Dry Index. If the world economy picks up, global trade will pick up as well and so too should the demand for ships. This chart looks bullish to us.

To conclude, we think that broad based commodity indices are actually lagging what is happening beneath the scenes. It is perhaps only a matter of weeks before they make up for lost time – that is move significantly higher.

Author's Disclosure: Long DBC, SLV, TBT

Comments

[Marco G.:]

Thank you, interesting insights, commodities being lead by equities, especially basic materials equities. Interesting, I was aware of the basic materials moving, but I wasn't aware of the implications.

Nov 17 07:45 AM