Over the last few weeks (since late March) we have noticed commodity prices slip more or less across the board. This brings us to the “million dollar” question – are we still bullish on commodity prices? In short yes…..we believe that a cyclical low in commodity prices has already been made and that they are now in the process of hammering out a long term bottom which may well involve one more retest of the Feb/March lows. In order for a sustainable rally to form a solid foundation must first be built, generally the longer the market hammers out a bottom the greater and more sustainable the upside potential. We have already noted on previous occasions that the CRB Spot Indices have already broken to multi-week highs and we believe that the futures indices (and commodity ETFs which are based on futures prices) will break to multi-week highs over the coming weeks.
From an inter market perspective there is a lot of support for higher rather than lower commodity prices over the coming weeks:
- The break-down in the US 30 & 20 year Treasuries
- Out performance of emerging markets relative to developed markets
- Out performance of small cap stocks relative to large caps
- Out performance of junk vs. investment grade corporate bonds
- The strength of commodity currencies like the Ruble, Rand, Real, Aussie & Canadian (in USD terms)
- Dramatic supply cut backs of energy and mining companies.
The breakdown in TLT is perhaps one of the most significant break-outs this year and is strongly suggestive of inflationary conditions in the not too distant future….which is very bullish for commodity prices in general (DBC)
Junk grade bonds are now outperforming investment grade (JNK relative to AGG is at a multi-week high)
We believe that any weakness in commodities should be seen as a buying opportunity rather than selling, that TBT (the inverse to TLT) should be bought in weakness or strength as with JNK.
