Is The Commodity Supercycle Extravaganza Here?

JC Parets
February 24, 2021

We've been talking about Commodities and a possible upcoming supercycle in this asset class.

The reason we're inclined to this view is that we're seeing signs of this on several different charts across the globe. Now when that happens, we've got to sit up and notice.

Remember when the unthinkable happened and Crude Oil traded below zero? Entertaining as it may be (to some) such extreme readings on the chart tend to act as signals for the future.

Take a look at the chart below. It is the S&P500 relative to the inverted ratio of the CRB Index (Cap-Weighted Commodity Index). The long-term chart below suggests that the extreme negative readings that we saw in Crude Oil seem to have probably sealed the top in this ratio. Can Commodities begin their outperformance going forward? It's quite likely. The individual constituents certainly look like they're ready for a good move!

Click on chart to enlarge view.

It is important to note here that we're looking at commodities like base metals and precious metals. Where on the one hand base metals have been performing well, precious metals have been quite a downer. Gold has been the worst place to be in for some time now as evidenced by the chart below.

Silver on the other has had more of a shine to its name, making six-month highs as opposed to Gold's six-month lows.

On a relative basis too, Silver has been outperforming Gold breaking out of a long-term dow-trend against the yellow metal. Let's take a moment here to see what this means. Historically an outperformance in Silver has been extremely bullish for the Precious metals subset. Often referred to as "Gold's crazy cousin", Siver is a high beta precious metal, and strength in this ratio bodes well for the precious metals going forward. This is also another reason why while we're staying away from Gold at current levels, we're not necessarily shorting Gold. That's an important distinction.

For perspective, here's what Platinum is up to. The shiny metal has achieved our first target of 1,300 and continues to hover around it. A move above 1,300 could take it further towards 1,735. This would add more fuel to the precious metal rally fire.

Take a look at this interesting chart next. The correlation between Platinum and a ratio chart of Emerging markets (EEM) to S&P500 has been hinting at a clear sign all along. As Platinum bottomed out in 2008, so did the underperformance of EEM against S&P500. This means that with every rise in Platinum, we've seen an outperformance in the Emerging markets as well. This circles back to the risk-on environment that we're witnessing in the market at present.

When you put the precious metals together, it looks like something is brewing there. With this ratio knocking up against a seven-year base and Platinum going through the roof as it is, we might see a catch-up trend developing in Gold as well.

For another nail in the coffin, let's look at the correlation between Gold and Copper (both in USD). Take a look at both metals from 1996 to 2002. What do we see here? Post the correction in 1996, both metals put in a double bottom and started recovering. While Gold managed to breakout in September 2002, Copper followed more than a year later in October 2003, and we can see the massive rally that followed these breakouts that lasted until the crash in 2008.

Cut to 2013-14 when both metals were down in the dumps again. What we see here is a repetition of the same pattern. Gold started recovering and subsequently broke out in June 2019. And Copper did what it did the last time! We saw a breakout in Copper in November 2020. So the same relationship holds true. Going by the move we saw the last time this happened, would it be crazy to think that a Commodity Supercycle might be on its way? I don't think so!

Let's take a look at the base metals now. We created an equally weighted custom index for base metals. One look at this chart and the story becomes quite clear. Base metals broke out of the two-year consolidation in October and continue to power through! Going by this move, there's definitely more to come.

Now let's take a look at what the individual names have to say.

First up, we have the torchbearer of the group- Copper. Copper has been on a tear since breaching its resistance at 467 in July 2020. The first base metal to breakout to new six-year highs, Copper has maintained the strong momentum and continues to lead the rally even today.

The next target we're looking at is 750, but a breakout above this level could take this metal near 1,035. With the indicator getting comfortable in the bullish regime, we could definitely look for that confirmation above 750.

Up next is Nickel. Nickel has been caught in a game of snakes and ladders with the overhead supply zone of 1,320 for years now! We've witnessed four such failed attempts to break out above 1320 and none have been fruitful in the past...except, the latest one.

Currently trading close to 1,400 this sustained move above an extremely important level suggests that all the supply that was available at the level of 1320 has been absorbed and that the metal is now ready for a fresh rally towards its next target near 1,650. We will continue to watch the level of 1,320, which if breached, will negate our bullish thesis in Nickel.

What's Aluminum up to? A couple of weeks back we witnessed a breakout in Aluminium too, taking out a three-year resistance. We're keeping an eye on this one to see if it sustains above 174, a level that the price has failed to conquer on three occasions in the past. The next target to track above 174 would be 189. The indicator holding on to the bullish momentum does bode for the metal going forward.

Lead has only now joined the breakout party, albeit slightly unwillingly. You've heard this often, the more times a level is tested, the more likely it is to be breached. With the indicator in a bullish regime, we might just see the follow-through of the breakout. Our bullish thesis holds its ground if Lead sustains above the risk management level of 170, with a target near 210.

Another late bloomer is Zinc. We did witness a breakout in the week gone by but we're watching this space to see if that breakout sustains above the risk management level of 231. A follow-through would mean a three-year base breakout. And we know that the bigger the base, the higher in space! A move above 231 could take this base metal towards levels of 285, if not, we might have to look out for 195 again.

So this was a round-up of the Commodity space with a lot of charts we're tracking hinting at a big move going forward. More signals in more charts reiterate the same view time and again and add to the conviction of a possible supercycle.

Are we there yet? Not quite. Could we get there soon? The charts above seem to suggest that, yes.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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