• 262 days Will The ECB Continue To Hike Rates?
  • 262 days Forbes: Aramco Remains Largest Company In The Middle East
  • 264 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 664 days Could Crypto Overtake Traditional Investment?
  • 669 days Americans Still Quitting Jobs At Record Pace
  • 671 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 674 days Is The Dollar Too Strong?
  • 674 days Big Tech Disappoints Investors on Earnings Calls
  • 675 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 677 days China Is Quietly Trying To Distance Itself From Russia
  • 677 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 681 days Crypto Investors Won Big In 2021
  • 681 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 682 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 684 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 685 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 688 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 689 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 689 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 691 days Are NFTs About To Take Over Gaming?
Trade In Counterfeit Goods Hits Half A Trillion Dollars

Trade In Counterfeit Goods Hits Half A Trillion Dollars

The counterfeit market has breached…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Market Sentiment At Its Lowest In 10 Months

Market Sentiment At Its Lowest In 10 Months

Stocks sold off last week…

  1. Home
  2. Markets
  3. Other

Commodities: The Topping Process Continues

Below is an extract from a commentary originally posted at www.speculative-investor.com on 10th April, 2008.

The daily CRB Index chart displayed below reveals an upside blow-off leading to a mid-March peak, followed by a sharp decline and then a rebound. If we are correct to view the March peak as the intermediate-term variety then the current rebound should lead to a secondary (lower) high within the next couple of weeks and then a decline to a new multi-month low.

If the CRB Index completes its topping process over the coming weeks and then takes out its late-March bottom some analysts will undoubtedly claim that the market action is related to deflation (indicating, caused by, or predicting deflation). You should ignore these people. Commodity bull markets invariably experience sharp corrections and when they happen it is not because of, or predictive of, deflation; it is simply due to the market having previously run up too far too fast. Markets routinely overshoot, and after they do it is normal for them to swing back in the opposite direction for a while regardless of the fundamentals.

The CRB's topping process is associated with the US dollar's bottoming process, so as the CRB rebounds to test its March peak the Dollar Index is dropping back to test its March bottom. The following chart shows the Dollar Index's current situation. The pullback by the Dollar Index to test its March low will likely be accompanied by a spike to new highs by the euro, but most of the dollar's competitors should make lower highs.

While on the topic of the inter-relationship between commodities and the US$ it is worth mentioning the Baltic Dry Index (BDI), a measure of ocean-going freight rates. The reason is that there is a loose relationship between freight-rate trends and commodity-price trends, and quite a tight relationship between international freight-rate trends and currency market trends. The second of these relationships has been discussed in several TSI commentaries since last September.

The US$-BDI relationship can be described as follows: Over the past 20 years, important turning points in the BDI have usually coincided with important turning points in the currency market, with peaks in freight rates coinciding with bottoms in the Dollar Index and bottoms in freight rates coinciding with peaks in the Dollar Index.

The following chart of the BDI reveals an intermediate-term topping process (a peak last November followed by an initial sharp decline and then the obligatory rebound) and therefore supports our view that the US$ is bottoming. This, in turn, supports our view that the commodity world is in the early stages of an intermediate-term correction (a multi-month downturn within a bull market).

It is clear that the November-2007 peak in the BDI did not coincide with the ultimate low for the Dollar Index, but it did mark intermediate-term bottoms for the US$ relative to the Canadian Dollar and the British Pound.

If it turns out that we are too bullish about the US dollar's short-term prospects then the biggest beneficiary will most likely be the gold sector. In our opinion, if the Dollar Index makes a SUSTAINED break to a new low then the gold price will quickly move to new highs and the price of the average gold stock, which is currently very depressed relative to the price of gold bullion, will explode upward. But the more likely outcome is that the start of a major advance in the gold sector will wait until May or June -- following the INITIAL phase of a US$ rebound.

 

Back to homepage

Leave a comment

Leave a comment