June 1, 2018

Commodity Sector Update

Raw Commodity Sector in Early Stages Of Longer-Term Cyclical Upturn

I’ve covered commodity markets as a journalist and analyst, on a full-time basis, for 33 years. I’ve seen a few cyclical ups and downs in the raw commodity sector during that time. I’m excited to report to you that markets’ price actions the first half of 2018 strongly suggest the raw commodity sector is now in a cyclical upturn that will likely last several years.

An examination of the Goldman Sachs Commodity Index (GSCI) weekly chart shows prices have been trending higher since early 2016 and have just hit a 3.5-year high. The solid price uptrend in place on the weekly GSCI chart suggests more gains in the index (and gains for commodity markets, in general) in the coming weeks and months. The GSCI is a basket of raw commodity futures markets’ prices (crude oil, metals, grains, foods) rolled into one composite index price.

Another feature in the world marketplace so far this year is rising world government bond yields. This translates into rising interest rates and inflation, too. Such has helped to hold back gains in global stock markets in recent months. Rising inflation and interest rates suggest that hard assets (commodities) will become more favorable to traders and investors than paper assets (stocks and bonds). This is especially true during times of problematic inflation. The next shoe to drop in this scenario of rising inflation will be major tops being put in the U.S. and world stock markets—as trader and investor monies flow from paper assets into hard assets.

The recent moonshot in lumber futures prices is one example of a major up-cycle for a raw commodity market. It’s also a reminder of commodity markets’ explosiveness and the potential for unimagined price gains. A look at the monthly continuation chart nearby lumber futures shows a nearly vertical price climb since the beginning of 2018, with a record high scored in May.

The monthly lumber chart dates back over 40 years, and the recent price rally dwarfs previous cyclical highs. The unprecedented move in lumber prices most certainly took virtually all market watchers by surprise.

Importantly, all commodity market prices are very cyclical in nature, and many times volatile, as the markets move to long-term cyclical highs and lows.

An examination of the longer-term lumber chart is a reminder (or maybe even a precursor) that cyclical price highs follow cyclical price lows in raw commodity markets. Many commodity markets have likely secured cyclical lows in recent years.

The unprecedented rally in lumber futures prices stretched the imagination regarding how high a raw commodity’s price can surge during a move to a longer-term cyclical high. Don’t rule out other raw commodity markets making moonshot moves to record highs in the coming few years–or maybe much sooner.


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