I received a fair amount of feedback to my recent post highlighting the weakness of commodity prices (see "A tactical sell signal, but no signs of a major top"). The key point raised is that since commodity are priced in US dollars, the recent strength in the greenback is going to pose a headwind for commodity prices. On the other hand, China has been the major marginal consumer of commodities, and Chinese demand is going to have a major effect on pricing.
So what is more important to commodity prices, the China effect or the USD effect?
An inverse correlation to USD
Let us consider each effect, one at a time. The chart below shows the CRB Index (black) and the USD Index (in green, inverted). The bottom panel shows the rolling correlation of the CRB with the USD. There is no question that there is a major
The commodity complex is in free fall. Agriculture products are falling out of bed. Metals are moving to yearly lows. Even copper has broken down which is the best gauge of world growth.
(click to enlarge)
And just take a look at the commodity index:
What we're seeing is serious. It either portends a new round of disinflation, deflation and/or recession, or it's a steep correction that has occurred due to a convergence of factors. It was just 2 months ago that I wrote an article (no longer on line) voicing my concern over what I was beginning to see. It was the beginning of my move to reduce my position in precious metals stocks and become a lot more cautious in my trading account.
Here is an extended excerpt from that article that I think is worth looking at from where we are now:
[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 emerging markets…a