Are We Starting to Doubt the Sustainability of the Commodity Rally?

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We’ve been skeptical of a sustainable commodity rally for quite some time now, despite all of the evidence pointing to one (including the actual run-up in prices of most of the base metals for much of this year). On August 4, we published this piece Banking on Technicals to Support Higher Base Metal Prices after a friend characterized our position on the recent commodity rally as follows, I get the distinct impression that you do NOT believe the commodities markets will continue to move higher – based on your belief that the world economy is, and will remain tepid. Okay, I’ll admit it that is how I felt and still how I feel, despite my friend’s technical data suggesting otherwise.

Here are two additional posts where basically, I outline why I took issue with those that believed the commodity markets would continue to rise: Are Industrial Metals Really on the Rise Part One and Are Industrial Metals Really on the Rise Part Two. Anyone that knows me will tell you that I’m basically an optimist in that I naturally tend to think things aren’t as bad as others do. But in this case, I have consistently felt that true demand just wasn’t driving this rally. (Check out Stuart’s earlier post this morning for insight as to what has driven up industrial metal prices).

So imagine my surprise when I came across this Reuters commentary by Barani Krishnan who said, A declining dollar and rallying equities markets have sparked wariness about potential inflation and drawn investors into commodities. But many wonder whether actual demand for commodities will materialize with the United States losing hundreds of thousands of jobs a month. Investors may want to see improvement in the US employment market, vital to the global economy, before pushing prices of raw materials higher. Ironically, I tend to not look much at unemployment because it’s a lagging economic indicator. But the fact that we are starting to hear a little doubt that this commodity rally may not be supported by steel beams and concrete demand but rather a house of cards so to speak, has been apparent to some of us market trackers for quite some time.

The Reuters piece involved an interview with Adam Sarhan, the author of The Sarhan Analysis on financial markets. Sarhan, who tracks copper according to the article, conveyed the fact that, the metal had been relying more on stock market strength and expectations of an economic rebound. The article goes on to say, the rally will not be sustained without supportive data on home building, manufacturing and employment.” We think indicators like construction levels, housing starts, new manufacturing orders, auto production and durable good orders make for good demand proxies. And those remain a mixed bag ¦.housing starts are starting to creep up but many don’t feel commercial real estate has hit bottom.

Here are a few recent charts courtesy of the US Census Bureau:

New orders:

Durable goods orders

Construction expenditures:

Automotive demand likely saw a nice uptick as the Cash for Clunkers program went into effect late this summer. What happens next with automotive demand remains to be seen. And though demand plays a much smaller role in determining industrial metals prices than it used to, eventually without it, I can’t see a sustainable commodity rally. Can you?

–Lisa Reisman

Comments (3)

  1. LP says:


    I think you guys are on point. Much of this rally has been on the backs of the weak dollar and strong equities. While I don’t believe there is a real correlation between the dollar and equities, it will be hard for anyone out there to convince me that there is no correlation between the dollar and commodities.

    I agree with Stuarts piece as well. The markets are pricing in a 4% GDP growth and people are buying based on that growth. I’m not convinced that we are going to grow at 4%. Maybe 2% ish. I am more of a pessimist.

    However, having said that the fear of a declining dollar is forcing a lot of people hide in commodities. Not to mention many fund managers have developed a liking to the “upside” in commodities. This has caused money to flow into commodities in the hopes that the BRIC countries growth story will continue. Many have not done the analysis you guys have done on China etc., where you guys have clearly described how cheap money and free stimulus money has created a false sense of demand for many of the commodities. Not to mention stockpiling.

    House of cards? I agree. But where is the inflection point when the house begins to crumble. I kept telling my friends and family to stay out of equities in 2005 because of what I saw, and I looked foolish for 2 years. But if you look at the markets now, we are still at the 1998-1999 levels. The key is in the timing.

  2. admin says:

    Lloyd, as always, your points are well taken, particularly around the dollar and timing. We’re going to be conducting additional analysis on the role of ETF’s as well. As for BRIC, do you think MetalMiner can coin the term BIC? We think it’s Brazil, India and China. I fail to see Russia as a significant emerging market. My $.02. LAR

  3. LP says:

    Your assessment is on point and your $0.02 is now worth at least $0.05.

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