The Commodities Market

The availability of commodities ETFs and long position mutual funds
coupled with a large bull market in commodities from 2001 - 2008
has lead to a substantial increase of interest in this area and has
re-positioned commodities from consummables to an asset class.

Over the long term, commodities have been a poor investment. The
famed CRB composite has appreciated by just 2.5% per annum since
1970. Commodities prices have tended to move in 6 year cycles, but
there have been 2 longer term bull markets in recent years: 1970 -
1980, and 2001 - 2008. There are pundits out there who maintain
that a long term or secular bull market is in place, but such claims
sorely test credulity. However, a multi year bull run in commodities
as occured over 2001 -2008 can be highly profitable for an investor
with rigorous discipline.

History shows commodities are most sensitive to interest rates and
the liquidity cycle. Now with short rates low around the world and a
new liquidity cycle underway to reflect easier monetary policy,
commodities have been moving up since Feb. '09, with this move
aided by a positive bounce in the leading economic indicators.

Since 1980, most advances in the CRB index, which closed today at
258, have been constrained in a range of 260 - 280. Breaks above that
level in 1979 and again in 2003, heralded sharp advances. So the
market is approaching important resistance, and with this test thought
near even before the global economy breaks into expansion, you can
appreciate the enthusiasm of commodites bulls as they anticipate
economic growth with the added fillip of inventory rebuilding.

I will do more on commodities going forward. Relative to the long
term trend of the CPI, commodities are indeed cheap as a class.
Below, I have linked to the CRB index chart. I would put resistance
in two close together spots -- 260 / 280 and again at 300. I would
also point out that commodities are crash prone when evidence of a
tough credit crunch emerges, as happened in 1980 and again in 2008.

CRB CHART.