Here’s What The Base Metals Can Tell You
Many of the conventional measures
of market and economic trends are
inaccurate in today’s jittery environment, making investing/trading all the more
difficult. But there are ways of filtering out some of the elements creating
these distortions to create more useful indicators.
A particular example of how conventional measures/indicators are breaking
down in today’s world is the CRB (Commodity Research Bureau) index. Many
financial market participants and economists look at the value of the CRB index
as an indication of global economic cycles. However, despite recent 6 year highs
in the index, the global economy (with few exceptions) is hardly moving at the
same pace. This can be attributed to extreme upward moves in a few of the
commodities in the index instead of a concerted move in all of the components.
Geo-politics
Precious metals
Since 9/11, the world’s money managers have had to incorporate event risk
into their overall strategies. As a result, precious metals, such as platinum
and gold, have benefited. While at the same time, traditional safe-haven assets
such as the US dollar have suffered, since America is no longer immune to attacks by foreign enemies. Typically, precious metals move up in price during
economic up-cycles due to inflation fears–which, currently, isn’t the case.
Energy related commodities
War fears and a general strike in Venezuela have caused energy-related
commodities such as oil and natural gas, to surge. Oil prices are up 85% and
natural gas prices are up over 200% from their lows last year. The overall move
in energy commodities account for the majority of the move in the CRB index.
What to watch
Investors would be better off looking at the base metals, which are better
correlated with industrial demand. These metals, which include copper, aluminum,
and zinc, can be tracked via the Goldman Sachs Industrial Metals Index (GYX).
Although this index is up 22% from its lows last year (mainly due to Chinese
demand), it has still not made the moves that would be associated with an
upturn in the Global economy.
On a technical note, the GYX index–on the weekly charts–has traded through
its 200-period moving average at 150 but needs to close above there for us to
get excited.