Commodities Appear to be Basing and Bottoming

By Tim Taschler, CMT, Sprott Global Resource Investments

A principle that I learned when I was first exposed to the commodity markets was that commodities, unlike a stock, can’t go to zero. But something else I learned was that when commodities trade like they have for the past several years, it’s as if they have been trading at “theoretical” zero.

When compared to how commodities have traded compared to stocks, one can see (Figure 1) that commodities at are at an all-time low versus stocks (using the S&P 500 and the CRB Commodity index).


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Figure 1: CRB Index / S&P 500 Large Cap Index
(Source: StockCharts.com as of January 19, 2018)

Looking at eight-year weekly charts (Figures 2–10), one can see that these commodities are down 50–60–70 percent from their highs. At the same time, massive basing patterns are quite clear. Once prices move up and breakout from these bases, there is the potential setup for a surge higher as prices reverse off the lows.

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Figure 2: CRB Index (Source: StockCharts.com as of January 19, 2018)

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Figure 3: Cocoa – Continuous Contract (EOD) (Source: StockCharts.com as of January 19, 2018)

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Figure 4: Coffee – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

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Figure 5: Corn – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

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Figure 6: Cotton – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

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Figure 7: Gold – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

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Figure 8: Soybeans – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

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Figure 9: Sugar – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

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Figure 10: Wheat – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

Crude oil (Figure 11) appears to be leading the break from its bottoming base.

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Figure 11: Light Crude Oil – Continuous Contract (Source: StockCharts.com as of January 19, 2018)

It’s unknowable if commodities have truly bottomed. Each commodity has its own unique supply and demand characteristics. And there are a wide variety of other inputs, both short- and long-term, that determine commodity pricing:  currency exchange rates, commitment of traders positioning, storage and weather, to name a few. But these commodities are, in my opinion, worth watching closely. Not only are commodities uncorrelated to the price of stocks and capable of adding true diversification to a portfolio, they are trading at historically low levels when compared to equities, as this chart (Figure 12) from DoubleLine Funds shows.

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Figure 12: Equities vs. Commodities (Source: DoubleLine Funds of December 6, 2017)

All of the above commodities are tradeable as ETFs. There are also commodity currencies and countries, like Brazil and Australia, which can be an indirect way to express an opinion on commodity prices. And there are stocks that are commodity related, like Deere (DE), Caterpillar (CAT), and Mosaic (MOS), as well as ETFs like MOO (VanEck Vectors Agribusiness ETF that is a basket of agricultural-based equities). Finally, there are investment vehicles related to farm land and farming, usually in the form of private funds for Accredited Investors.

With the stock market having rallied for almost 10 years, and the recent volatility in cryptocurrencies, it might just be time to take a serious look at commodities (i.e., tangible assets) as an area of opportunity. Base metals and energy seem to have begun to turn higher off their lows. I would expect that food commodities are set to begin their move as well. You have to do your homework with this sector as with any other. Study the charts and understand the fundamentals, as both are important in managing any investment. You will have to pay attention to how currencies and interest rates trade as well. That said, food commodities, especially grains, sure look like they are setting up with some interesting trade opportunities.

If you have questions or want to know if commodity exposure is right for you, feel free to contact me.

Tim Taschler

CMT, Sprott Global

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Tim has been involved with the financial industry for over 30 years.  In 1986-1988, he was a market maker (floor trader) at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT), where he traded through the ’87 stock market crash.  He has been involved in both private equity as well as public markets.  Tim is experienced with commodities, stocks, futures, options and bonds.

For the fourteen years prior to joining Sprott, Tim worked with both retail and institutional clients helping customize strategies seeking opportunistic asset allocations based primarily on technical analysis.  Using a top-down approach starting with global economic conditions, Tim looks at various global markets and equity sectors before drilling down to specific investment ideas that offer an acceptable risk/reward profile.  Focused on helping clients work toward their financial objectives, Tim designs strategies to build wealth and reduce risk.

Tim served as a Senior Vice President, Investments at Stifel (2012-2016) and at Wedbush (2007-2012).  Prior to that he was an Investment Advisor at AG Edwards (2003-2007) and worked in private equity (1996-2003) and technology (1987-1996).

Tim’s career has allowed him the opportunity to live and work in Europe, the Middle East and Asia.  He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA), and is a director of the American Association of Professional Technical Analysts (AAPTA).  He graduated from the University of Dayton in 1979 with a B.A. in English.