Commodities continue to take it hard! The CRB Index along with the other big commodity indices (like the Goldman, Rogers and Dow AIG) have fallen by some 6% over the last month and have gone essentially nowhere since early June. Is this cause for alarm? Well as they say “it isn’t over until it is over”! Commodity indices and supporting indicators have got more room to move before they start painting a bearish scenario for commodity markets.
As far as the bond market goes, there has not been any breakdown in the outperformance of inflation protected bond mutual funds relative to the US ten year. Furthermore, there has not been any meaningful breakdown in the value of the Aussie dollar, which from a currency market perspective is a great proxy for the outlook for commodities in general. We place considerable emphasis on the signals being generated by the bond and currency market because they are more often than not leading indicators for what happens in commodity markets themselves.
There has been no breakdown in the out performance of commodities (the CRB) relative to US treasuries (the US 30 year) and there is a reasonable amount of room left before there is a confirmation of a breakout.
As far as commodities go themselves there is also room to move before a bearish breakout is signaled. The CRB has support at about the 230 level (8%) from current levels, and Oil (perhaps the most important commodity) is still 12% above its “last line” of bullish support at $60.
So for the time being at least we have to give the commodity/inflation trade the benefit of the doubt. We realize that markets move in broad based trends but that there is often lots of noise to shake the weak hands out of the market. We think that the fall in the CRB index over the last month is just that……the market’s attempt to disguise its true intentions. From a fundamental perspective we are somewhat comforted by the fact that the ISM Manufacturing Survey has moved above the 50 level signaling economic expansion. Growth and lots of liquidity are perfect breeding grounds for high inflation and high commodity prices. Perhaps a higher silver price yesterday was more than just a hint!
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