By Bryan Rich
October 13, 2017, 3:30 pm EST
Yesterday we talked about the case for commodities and the opportunity for a rotation into commodities stocks.
The valuation of commodities relative to stocks has only been this disconnected (stocks strong, commodities weak) twice, historically over the past 100 years: at the depths of the Great Depression in the early 30s and toward the end of the Bretton Woods currency system.
That supports the case that we’re in the early days of a bull market in commodities, especially considering where we stand in the global economic recovery, underpinned by the “reflation” focus at both the monetary and fiscal policy levels. It’s a recipe for hotter demand for commodities.
With that, let’s take a look at a few charts as we close the week.
We talked about copper yesterday. This continues to ring the bell, alerting us that better economic growth is coming – maybe a boom.
Copper is up 6.5% in the past two weeks, back of $3 and closing in on the highs of the year – which is a three year high. And remember, we looked at the potential break of this big six-year downtrend back in August. That has broken, retested and confirms the trend change.
We talked about the fundamental case for oil this week. And we looked at the technical case, as it made a brief test of the 200 day moving average and quickly bounced back. It’s up about 4% on the week.
We have this inverse head and shoulder (in the chart below) that projects a move back to the low $80s. And as part of that technical picture, we’re setting up for a break of a big two-year trendline that should open the doors to a move back into the $70+ oil area.
Iron ore was the biggest mover of the day – up 6% today. This has been a deeply depressed market through the post-financial crisis era. In addition to the broad commodities weakness, iron ore prices have suffered from the dumping of poor quailty iron ore by Chinese producers. Those times seem to be changing.
This week there was a fraud claim on a big Japanese steel maker for fudging it’s quality data. Keep an eye on this one as it could lead to more, and could lead to a supply disruption in industrial metals.
Then today we had Chinese data that showed record imports of iron ore. This is a signal that there’s both an envirionmental movement and an anti-dumping movement against low grade iron ore that has been influencing supply and prices (and crushing producers). This big Chinese data point is also in line with the message copper is sending: perhaps the Chinese economy is doing better than most think.
With that, let’s take a look at a few charts as we close the week. The valuation of commodities relative to stocks has only been this disconnected (stocks strong, commodities weak) twice, historically over the past 100 years: at the depths of the Great Depression in the early 30s and toward the end of the Bretton Woods currency system.
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|Last week we discussed the building support for a next leg higher in commodities prices. China is clearly a very important determinant in where commodities go. And with the news last week about cooperation between the Trump team and China, on trade, we may have the catalyst to get commodities moving higher again.It just so happens that oil (the most traded commodity in the world) is rebounding too, on the catalyst of prospects of an OPEC extension to the production cuts they announced last November.In fact, overnight, Saudi Arabia and Russia said they would do “whatever it takes” to cut supply (i.e. whatever it takes to get oil prices higher). Oil was up big today on that news.When you hear these words spoken from policy-makers (those that can dictate outcomes), it should get everyone’s attention. Those are the exact words uttered by ECB head Mario Draghi, that ended the bond market assault in Spain and Italy that were threatening the existence of the euro and euro zone. The Spanish 10-year yield collapsed from 7.8% (unsustainable borrowing rate for the Spanish government, and threatening imminent default) to 1% over the next three years — and the ECB, while threatening to buy an unlimited amount of bonds to push those yields lower, didn’t have to buy a single bond. It was the mere threat of ‘whatever it takes’ that did the trick.
As for oil: From the depths of the oil price crash last year, remember, we discussed the prospects for a huge bounce. Oil prices at $26 were threatening to undo the trillions of dollars of work central banks and governments had done to stabilize the global economy. Central banks couldn’t let it happen. After a series of coordinated responses (from the BOJ, China, ECB and the Fed), oil bottomed and quickly doubled.
Also at that time, two of the best oil traders in the world were calling the bottom and calling for $70-$80 oil by this year (Pierre Andurand and Andy Hall). Another commodities king that called the bottom: Leigh Goehring.
Goehring, one of the best commodities investors on the planet, has also laid out the case for $100 oil by next year. He says he’s “wildly bullish” oil in his recent quarterly investor letter at his new fund, Goehring & Rozencwajg.
Goehring argues that the IEA inventory numbers are flawed. He thinks oil the market is already over-supplied and is in a draw, as of May of last year. With that, he thinks the OPEC cuts will ultimately exacerbate the deficit and send prices aggressively higher. He says “we remain ‘wildly’ bullish and believe that there is a very high probability of oil prices reaching triple digits in the first half of 2018.”
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