Wednesday, August 4, 2010

"Why are Commodities Rallying?"

The commodity we've posted on recently, wheat, dropped 30 cents from it's intermediate top-tick on Monday through yesterday.
Today it has gained back .265 to $7.065/bushel.
From Money Morning (Australia):
Your editor is otherwise engaged today, so we hand over the reins to Slipstream Trader Murray Dawes and his take on the recent rally in commodities, followed by the latest dispatch from Dr. Alex Cowie at Diggers and Dealers in Kalgoorlie…
What’s going on in the commodity markets at the moment? We’re seeing some amazing strength in commodities across the board from soft commodities such as wheat, sugar and soy products to the metals such as lead, tin and zinc.
And Copper has also taken off to the upside in the last few weeks.

Is this the sign of an economy on the mend? Should we be piling into resource stocks and agricultural stocks in expectation of an uplift in earnings?
Let’s have a look at recent price action in the CRB index which is an index that tracks the prices of a basket of soft and hard commodities. I’ll also overlay the US Dollar index and invert the price of the US Dollar to see if there is any correlation between the two:

CRB Index Vs US Dollar index inverted

Click here to enlarge 

The blue line is the US Dollar index. It’s quite clear when looking at this chart that there is a high correlation between the moves in the US Dollar and the rally in commodities.
It appears that much of this rally can be attributed to the current sell-off in the US Dollar....MORE