Checking in on Commodities

It’s been a tough year to make money. Bonds are suffering through one of their worst periods in recent memory. Equities have faced similar pressure amidst slowing economic growth and a valuation reset. Returns on foreign investments haven’t fared much better – Europe faces geopolitical turmoil, and China, the largest emerging market economy, clings to a COVID Zero policy that’s crimped activity and snarled supply chains. The few bright spots abroad have been hampered by a strong U.S. Dollar.

Commodities are the one place investors have been able to hide.

The CRB Commodity Index is up 9% year-to-date, powered by energy, agriculture, and livestock. We’re all feeling the pressure at the pump – especially now that refiners have switched to their summer blends – so it comes as no surprise that crude oil is having a strong year. West Texas Intermediate is in the midst of a multi-year uptrend:

When Russia began its invasion of Ukraine earlier this year, oil spiked to more than $130 per barrel, surpassing the 2011-2014 highs. In the following days, prices reversed lower, and it looked as though crude’s spectacular rally from the COVID lows had culminated with a blowoff top and a failed breakout. But instead of slumping lower, oil set a series of higher lows and finds itself above that key level once again.

Prices for agriculture and livestock commodities have risen as well, supported by turmoil in Eastern Europe, inflationary pressures that have pushed up production costs, and weather that’s contributed to a weaker than usual planting season. The Bloomberg Commodity Agriculture and Livestock Index erased 6 years of losses in 18 months.

The collective group is now up against long-term resistance from the 2011-2012 lows, and they’ve spent the last few months digesting that overhead supply. If they follow the way of crude oil, they’ll soon resolve this consolidation in the direction of their multi-year trend.

While energy and ags have led the way higher in 2022, metals have been stuck in the mud. Dr. Copper, the industrial metal with a PhD in economics, just had its best 1-day move since 2013. One day doesn’t make a trend, though. Copper stopped rising last spring, about the time it reached its 2011 highs. Since then, it’s been stuck in tight consolidation range.

Gold started the year with a bang, rising 13% through March. It’s since given up those gains and is roughly flat since December. Like Copper, Gold ran into its 2011 highs and has been stuck in a frustrating range ever since. Getting back above those 2011 highs, which is also the 61.8% retracement of this multi-year range, would be a solid step toward resuming a long-term uptrend.

Perhaps what Gold needs is a catalyst to get it moving. It may get one from a fellow precious metal, Silver. Gold and Silver tend to be highly correlated, and during uptrends, Silver usually outperforms. Silver has been in consolidation mode since it’s own 2020 peak, but unlike Gold, it broke support and fell to new lows last month.

Prices are trying to rally back above last year’s lows. That level has plenty of memory over the last 15 years, as it marked significant turning points in both 2008 and 2016. Maybe a false breakdown in Silver is the trigger that metals need to join the party in the commodities space.

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