U.S. Dollar Aside, Commodities Are Strengthening

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Includes: DBC, FXA, SLV
by: Thomas MacLeod

The life and times of David Ricardo is something all traders should study. He famously took a substantial position against a Napoleon victory at the battle of Waterloo by backing British securities.

If you have the time, it is well worth reading up on his life. He was the third of seventeen children, eloped, became estranged from his family, was an original member of the Royal Geographic society and became a noted trader and economist.

In short, a typical man of his times with a genuine inquiring mind. In his words:

If a commodity were in no way useful, in other words, if it could in no way contribute to our gratification, it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.

Commodities have inherit value. They are stuff off which other stuff is made.

Recently commodity prices have strengthened. A weak USD has often been cited as the main cause. This theory sounds reasonably a first glance, but it shows laziness of thought and analysis. A five minute perusal of the major commodity indexes shows that they are rising in non USD terms as well. We take this as an indication that a combination of rising inflation and global industrial production are driving this.

Our interest has been raised by the manner in which the CRB index has risen against the developed currencies (excluding NZD and AUD).

Yes. commodity prices are increasing from a fairly low base and, yes we have have seen unprecedented central bank intervention, which looks like continuing for awhile longer. We still believe that the outperformance of commodities in USD and non USD terms is far from over.

Look at the long term rate of change in the charts below. There is a suggestion that commodities are fast becoming the long term store of wealth.

CRB::UDN

CRB::FXA

CRB::GLD

We would take the CRB outperforming the AUD as a signal that we are about to experience a significant rise in commodity prices.

Disclosure: Long DBC, SLV, FXA