It seems that the bears have come out of the woodwork now for commodity markets. Over the weekend I read countless articles by bloggers and journalists alike purporting that this was the end of the "commodity bubble." It seems that their arguments were very short sighted and more affected by market volatility than anything else. I will argue that the outlook for commodities has not changed one bit. But more on that later.
I want to highlight the short comings of looking at what everyone else looks at, namely commodity futures prices. The daily or even weekly changes in commodity prices has more to do with the emotions of the crowd than anything to do with the demand and supply of commodities. In the real world, demand and supply conditions don't change that quickly, certainly not as quickly as the futures market suggests. Accordingly, if you look purely at the price behavior of futures markets, all you are really doing is analyzing emotion, which is "random" at the best of times. If you really want to know what is happening with commodity prices you need to look at what happens in the real world, that is, you need to understand the behavior of prices for which commodities are actually transacting for in the real world, i.e. spot prices.
It is interesting to note that the CRB Spot Commodities Index has hardly budged over the last few weeks. It certainly does not appear to be displaying any out of character behavior:
The theme driving commodity prices higher over the last two years remains very much alive. It seems that central banks, particularly the Fed, are reluctant to reign in liquidity, which is a primary driver of commodity prices. Note that if liquidity was being reigned in junk grade corporate bonds would be showing material weakness, yet on Friday the junk bond ETFs registered multi-week highs.
Furthermore, it does not appear that world growth is slowing down. Yes some purchasing managers indices have come off their recent highs as of late but they are all still very much in the expansionary mode (well above 50).
I think the weakness we experienced in commodity markets last week was merely a shake out of poorly financed speculators. Now that enough speculators have been cleaned out, commodity markets should resume their advance.
Disclosure: I am long DBC.