[Originally published on Jun 2, 2014.]
At a conference in 2007, a speaker initiated the proceedings by posing the question "what are the most expensive words in the English language?" The answer to this was "it's different this time." The subject of the event was commodities, namely whether or not the space had developed sufficiently to be considered a viable asset class and a beneficial component of investors' portfolios. During those heady pre-crisis days, the winds indeed appeared to be at the back of investing in raw materials. So much so that experts filled investment notes and the financial press with talk of a commodities super-cycle, driven by shifting supply/demand dynamics and rising investor appetite, partly fueled by the proliferation of new, accessible products.
(click to enlarge)During the crisis and its immediate aftermath, the bullish case for commodities remained largely intact. This was the period when
Commodity price trends are a hot topic among some of my clients and audience members. This is the first of three articles about commodity price, covering basic material that someone buying or selling commodities should understand. The need for the information goes well beyond the trading desk of a broker, however. Plenty of sales people and purchasing managers should understand commodity pricing, even if commodities are only a small part of the day's work. Further, anyone whose company is heavily dependent on some commodity should understand that commodity very well. The product may use copper or cotton, leather or lead. In any case, understanding how commodity prices change will help you buy or sell whatever your company is involved in.
Commodity Basic Fact #1: Commodity prices are more variable than overall prices.
The chart below compares changes in the CRB commodity price index with changes in the U.S. Consumer Price
The recent, aggressive ECB ease, combined with some mild Fed growls about increasing rates "at some point," ought to be good news for the dollar against the Euro. And so it has been, although as you see in this weekly chart (source: Bloomberg) the weakening of the Euro has been ((a)) mild and ((b)) started more than a month before the ECB actually took action. (Note that the units here are dollars per Euro).
Even though the ECB did considerably more than expected, much of that was in the form of a promise; until the body takes concrete steps towards implementing some of the new QE forms, the decline in the Euro is likely to be relatively slow and steady. Similarly, although the Yen has stopped weakening in 2014, I expect that trend has further to go as long as the Bank of Japan doesn't lose its nerve with