It all seems so easy when things go your way but then almost without warning they turn on you with no apparent warning! Anyway getting straight to the point – has anything changed over the last few days to bring into question the rally in commodities and particularly the breakout of the CRB over the last few weeks?
Let us look at commodities from three perspectives:
- Using our own proprietary commodity index
- The performance of US Treasuries TIP vs. non TIP
- Commodity currencies relative to the USD
From these we should get a fair idea of any cracks appearing in the commodity "trade"
We constructed our own proprietary commodity index using five critically important commodities which are not constituents of any of the popular commodity indices and accordingly are not so subject to speculative trade. These commodities are polyethylene, wool, coal, rubber, and pulp. Each commodity has an equal weight in the index. From the chart below there does not appear to be a problem in the uptrend.
From an inflation expectation perspective it appears that inflation protected 10 year US Treasuries are on the verge of breaking to a multi-week high against conventional 10 year US Treasuries. This suggests that inflationary expectations are rising rather than falling which can only be supportive of more upside in commodities over the coming weeks or months.
If we create an index of the Aussie, Kiwi, Rouble, Rand, and Real against the USD we get a good picture of how commodity currencies are performing. Commodity currencies are generally leading indicators for the behaviour of commodities themselves. There does not appear to be any loss of momentum in commodity currencies relative to the USD (or the JPY for that matter).
From the charts above we conclude that the weakness we witnessed over the last three days in the CRB and other board based commodity indices such as the Rogers, DJAIG, and Goldman Sachs composites was entirely within the confines of normal volatility (some may use the term profit taking). Until we see evidence to the contrary (i.e. breakdowns in the three indices above) we continue to be positioned for more upside in commodities……..and of course continue to keep a rabbit's tail in our back pockets.
