With 1932 as a base, commodities price composites have trended moderately higher. Given the
extraordinary volatility of commodites, the top part of the historic price channel has tended to
run at 2x the bottom or base trend line. The last two huge spikes up in price took place in 1980
and 2008. For the CRB index ($CRB), The base trend line up to the historic mid - point describes
a range of 290 - 445. At 301 presently, the CRB broad commodities index is trading only slightly
above the longer term trend. Now I also use an economic model based on what I think is a
sensible production cost curve + mark - up, and that has the CRB "fairly valued" at 325 - 330.
The CRB did experience a crash over the mid - 2008 to early 2009 interval when it fell 57%.
Since then, the market has staged a cyclical bull advance until Mar. of this year, when the
market started to break below trend. $CRB Chart
The weakness in the market since May, 2011 reflects decelerating economic growth in China --
a prime commodities buyer in the world market, a downturn within the EU and not least, the
end of large scale QE by the Fed, which, no doubt, prompted plenty of speculative interest
over the early 2009 - mid - 2011 period.
Since mid - 2011, global production growth has decelerated further and has been moderate
enough not to chew up excess capacity in rapid fashion. This has cooled speculative trading
and inventory stocking in the commodities markets.
It is noteworthy that China has begun the process of loosening the monetary reins. This could
help the commodities market going forward, but players still need to be careful as China is likely
to move cautiously in the wake of a troublesome real estate price boom triggered by the
monetary excesses seen over 2009 - 2010 when it put on a huge credit driven stimulus program.
The CRB is trading down near both long and intermediate term support in the 290 - 295 area. the
market is oversold and is reasonably valued at the current level. On the flip side, a sharp break
below support could be an alarming development as it would suggest players are growing
more concerned about a fizzling out of global real growth going forward.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 40 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 !!!
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