Commodity Market - Is the bull back?

Back on March 24th 2009, I declared the Commodity Market bull is back.  We may be close if not already at the next bottom poised for the next leg up.  The upward exponential drawing below of course may be materially wrong, but it should correct quickly whenever bottom hits.

Timing of course is IMPOSSIBLE!  Catching falling knives is very painful.

Investing in this sector will only marginally help offset the cost of living crunch everyone will continue to face once the bull resumes.  This is inline with my 2008 post of global consumption squeezing the American consumption.

Back in 2009, the graph I showed was the standard CRB index.  What I didn't realize at the time, like most indexes, it is changed over time to re-prioritize weighting of the underlying components.   The previous revision to this index was more evenly distributed across all resources.

Although weighting differently may be more meaningful, it does skew the graph unfairly.  When an ETF composition is changed to be "fair" the entire index should be recomputed back to the start of the index to reflect a graph that has the same underlying funds consistently.

That however is not done.  I found an index where the composition was NOT changed with the last revision,  called Reuters Continuous Commodity Index (CCI).   The chart looks materially different than the current CRB index.

I believe that keeping the same mix of items is more realistic to show the impact of commodity prices.
Look at the chart below to see how even in 2008 crash, the bottom BARELY touched the high in 1980!
This graph shows what I believe is a more parabolic price change that we are experiencing.  Some deem it inflation but wages are not rising.   I deem it simply what it is, commodity prices are rising.  This is NOT about strictly US dollar debasement.  It is about poorer countries buying more commodities driving prices up for Americans.  Countries like China and India simply did not compete with Americans for resources 30 years ago as percent of purchasing.  Also consider watching Chris Martenson on exponential growth and commodity issues.

The only question is, how far does it go down before the trend of up up up resumes.  Strap on, for whenever the next leg up starts, it won't be fun.  High unemployment AND rising costs.

Usual suspects to invest in.  OIH  , DBA, GLD, GDX, etc.  The ETF GCC tries to mirror the blend that the CCI presents.
(UPDATE: 6-28, end prices.  GDX-43.30, GDXJ 18.20, OIH 34.30, DBA 27.77, GCC - 27.55, TAN - 17.74)

Food costs rising

I did a double post today, check out the previous post (click)

There are signs food prices are rising not just in America, but around the world.

In America, General Mills, Kraft And Kellogg Hike Prices On Selected Food Products. Granted this is really a non-story, since it is indescribably small impact.

But in an economy that has 9.5% official unemployment, and 15%+ unofficial, having food prices rise is directly opposite of what classic deflation-ists say can happen.

Further, there have been food riots

Algerian Food Riots

Tunisia food Riots

Global Food supply dwindling

India Food prices jumped 18% last month alone

Indonesia urge people to grow their own food.

Laos Food Riots

Some interesting pictures about recent food riots

Nifty commentary and commodity charts

Oh yea, just to really get a nice topic of conversation on food problems, the bee population is taking a hard nose dive. This is unprecedented and critical for food production.

Americas desire to avoid pain by printing trillions of dollars and flooding the world with US cash is a big contributor to accelerating food problems couple that with food production issues. Ben Bernanke, is in fact exporting death across the world. Luckily for me living in the USA, it has helped me maintain my lifestyle. But that isn't the point, this will not resolve well. We are going down a very nasty path, and its full steam ahead.

I stated back in 2008, as resource inflation grows, Americans income will have increased amount spent on resources. What I failed to realize is in the process poorer countries will get crushed, since they do not have as much disposable income to handle the increase in resource costs.

Marc Faber explains why as resource prices increase, western countries should fare better then developing nations. I think this spells disaster for international co-operation in the years to come.

Comex hikes margin requirements for some commodities

On January 5th, I posted about the intent of the Futures Trading Commission to clamp down on large positions in futures. That event will take months to come into effect. I stated that any regression of commodities due to this action would be temporary, and that speculation is not the root of commodity price jumps over the long haul. Speculation price spikes can only happen in a market where the spread between production and demand is tight.

Recently commodity prices has been falling, and Thursday we know why. Comex today raised margins requirements for gold and silver by 6%, along with some other commodities. The recent price declines I suspect was big money with the inside scoop lightening positions to avoid the required sell off to meet margin requirements.

Of course, I am wrong, since that would be illegal for insider trading information on government regulation changes......

In any event it will be interesting to see what this, and future steps will do to commodity prices. But make no mistake we are in a commodity bubble run, being fueled by all the loose money finding a "home" in commodities.

I am basically waiting for Gary of the smart money tracker to give a green light for gold and silver for me to reload.

Chadv11-23

Commodity Futures Trading Commission to limit commodity positions

The Commodity Futures Trading Commission has introduced a plan to limit the size of futures positions by individual institutions. The idea is, no one entity should have a undo influence on commodity pricing.

Commissioner Bart Chilton stated:
“While I will now support publishing a position limit proposal for public comment, I will continue to make the case that we need to address excessive speculation in these markets immediately,”

Further commentary

“In light of the existence of large speculative positions in today’s energy and agricultural markets, it is imperative that the Commission to do something now, and without delay, in order to address these large positions and send a message of confidence and certainty to market participants,” said Jim Collura, spokesman for the Commodity Market Oversight Coalition.

Changing rules would likely take more than 90 days, due to process of changing rules. So while this change will not directly change the pricing of commodities in the near future, the writing is on the wall for a temporary decline.

I say temporary, since speculators drive price up on commodities when there is tight supply. For example , if the supply of corn was at an all time high, speculators would fail to drive the price up at all, due to all the excess available.

This measure, once enacted will be called as the fix for the commodity bubble. In reality, it will be temporary relief. Every year it is my position commodities will get tighter due to China, India, and other developing nations require more resources. Once the supply gets slightly tighter, the excess speculation will not be needed, and prices will resume their march higher.

keep in mind, temporary relief could be upwards of a year as the excess supply is consumed.

Only then, there will be no more tricks to stop the march.

Commodity Prices

The CNNMoney article Fed's Tax on the consumer highlights the rising commodity prices of corn and cotton prices in the last two months. Corn and Cotton prices have skyrocketed by 35% in 8 weeks.

From WebSufinMurfs FinancialBlog2

The knee jerk reaction is doubt there is unprecedented demand for these commodities, making it an organic price rise in the current world economy climate. The obvious question is what is then driving prices to rise?

The article highlights the Federal Reserve Banks loose monetary policies and links the rising prices to loose money. While I do agree with this conclusion somewhat, reducing complex marketplaces to a single simple analysis can be dangerous.

The logic goes that with loose monetary policy the large banks and investors are cautious to put their money into stocks and other assets that have already risen dramatically in the last year. And placing investments in physical assets, such as corn and cotton, is a safer "pile on" for the next asset bubble to be blown.

Again, I am not dismissing this argument, but I do challenge that this is the primary driver.

To look for other drivers, lets look at corn and cotton, how do these commodities differ than say, Lima beans? Corn is used as food......oh yea, and due to Mr. Bush's wisdom it is used for fuel now, funded BY the government money.

Therefore as the government pumps trillions of dollars in the economy through poor spending decisions, one of them is to pump money into backing the idea that Corn is fuel.

Farmers are in fact, investors, and choose crops with the brightest outlook for profits. As oil prices have stabilized and start to rise, the cost for ethanol becomes a cheaper alternative. When oil was at 60 bucks a barrel, ethanol has less of a competitive advantage. Couple the price of fuel rising with government handouts to promote the consumption of ethanol.......is it a wonder corn will get more expensive over time?

So how does this affect cotton......if demand for corn goes up, and there are more "consumers" for corn, farmers switching crops have to drop the next biggest cash cow crop, cotton. Plus there are arguments for global demand in third world countries etc. Again, I want to avoid presenting that we can simplify the cost driver to just "two" things.

But I do want to avoid the over zealous froth I am starting to see that the Federal Reserve Bank is the cause of all market issues. While I agree, the Federal Reserve Banks unholy access to the financial system is by far one of the biggest drivers of financial bubbles and financial dislocations, I also want to avoid simply placing all blame for any bubble that forms in the private sector.

What does this have to do with investing? Next week is the Fed's big QE2 announcement. And I hope that Mr. Bernanke reads the CNNMoney article and views it according to answering problems with what you know. For while I caution readers to avoid classifying all problems derived from the fed, I do encourage Mr. Bernanke to view it as such, and curb his market interference.