I have run across many web articles in which it is argued that we are in a long term bull
market in commodities driven by rising demand from China and the battery of emerging
and developing economies going against longer term supply constraints. I think the broad
commodities composites are reasonable, but there is no evidence at hand to date that the
world is witnessing a long term bull run in commodities. There was a strong market over
the 1971 - 81 period, and then another good one from 2002 through early 2008. However,
at its cyclical low in the latter part of 2008, the CRB commodities composite was just
slightly above cyclical low points seen as far back as the mid 1970s.
There has been a cyclical bull run in place since late 2008, when China initiated its massive
fiscal stimulus program. The first leg was a strong run and ran from 12/08 - 12/09. A new
upleg started in the spring of 2010 and remains in place, with positive diffusion measures
for the main categories. The CRB composite has been in a nearly 40 year trading range. It
is now reading around 300, and when it crosses above long term resistance of 280, it
generally does well, provided the global economy continues to expand. In fact, it can
experience upside blow-off periods late in an expansion cycle when supply/ demand
conditions are tight.
Commodities are sensitive to the leading economic indicators, and are especially
sensitive to monetary policy. Thus, the CRB has benefited from hype about the Fed's QE '2
program, but we have also seen a recent whipsaw when China again raised bank reserve
requirements and announced an interest in seeking tougher management of the rise of
inflation pressure it is encountering. China greatly desires to maintain relatively strong
growth, so it is doubtful they have entered crunch mode with their monetary policy.
The CRB is coming off a strong short term overbought. There is shorter term trend support
at 285, chart pattern support at 275, and longer term trend support at roughly 265.
CRB chart. I have included Goldman's agricultural composite along with the CRB chart.
Note how the "ags" have forced up the CRB since summer and remember that farm /
grain prices can be extremely volatile and be subject seasonal weakness in cold weather.
From a cyclical perspective, it is likely too early to try to top spot the CRB at this point.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!