The “Commodity Super Cycle” went into extra innings last week, when the Reuters Jefferies Commodity CRB index rallied to as high as 359.14, eclipsing the previous high of 350.96 set on February 2nd. Rarely do so many economic and political forces all point to one single direction. Fueling the “Commodity Super Cycle” is China’s juggernaut economy, which is spreading its wings to Japan, South Korea, and across the Asian region, and creating strong demand for natural resources.
Two other salient factors are affecting this rally. First, global central bankers have been expanding their nation’s money supply to immunize their equity markets from the effect of soaring energy and raw material costs. In addition, the US stand-off with Iran which has disclosed that they are enriching uranium and have threatened to close the Strait of Hormuz if attacked, has made crude oil markets very jittery.
The fact that the “Commodity Super Cycle” has continued its trajectory means that the easy money has already been squeezed out of the Reuters CRB rally. From now on, traders will start to worry about when this cycle will end, which could cause sudden panic sell-offs. Experienced metals dealers know how to shake out weak-handed speculators along the way, and the volatility in the metals and energy markets are bound to reach record proportions.
This extended cycle also means that there is less room for error, where periodic shakeouts seem designed to scare off first time buyers. The “Commodity Super Cycle” is expected to take the fewest number of passengers along for the ride. But as long as global equity markets remain buoyant and G-7 central bankers refuse to tighten their money supply in a meaningful way, the “Commodity Super Cycle” will remain a major force to be reckoned with in the foreseeable future.
Global hedge fund traders, who control about $1.5 trillion, have been piling into copper, crude oil, gold, silver, platinum, and zinc, the super-stars of the “Commodity Super Cycle” to grab quick profits. They are driving up prices with no intention of ever taking delivery. These fickle hedge fund traders can roil the markets in the short term, however, the more stable commodity importers in Asia, Europe, the US, and elsewhere, will ultimately determine the longevity of the cycle.
And everything depends upon proper listening. If ten people listen to the same speech or story, each one may understand it differently. Perhaps only one of them will understand it correctly. Therefore, listen to the riddles of the G-7 central bankers with a healthy dose of cynicism, brush away their smokescreens designed to cloud your vision, in order to successfully profit from the global commodity and equity markets.
Reuters Jefferies Commodity CRB Index 4-yr chart:
From a purely technical perspective, the Reuters CRB index tested key horizontal support at the 315-level in early March, following a nasty 8% correction in February. The CRB index received good support from a major upward sloping trend-line that coincided with the 315-level, where the index built a solid base of support, before catapulting higher into extra innings.
“A trend in motion will stay in motion until some outside force knocks it off its course.” So until the CRB index falls below the key horizontal support at the 315-level, the technical outlook remains bullish. In times of doubt over the long-term longevity of the “Commodity Super Cycle”, it helps to review the fundamental forces that brought it here, and the bumps it has endured along the way.
Mr. Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.
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