Commodities Weekly (04-02-2021)

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Many of the same themes that we came across in last week's Commodity Report continue to play out.

Overhead supply keeps demand at bay while price churns sideways, offering mixed signals.

Like many areas of the market, Commodities are a bit messy.

While sideways price action and choppy market conditions are the norms at the moment, there is one consolidation in the Commodity space that demands our close attention.

As JC pointed out in last night's Monthly Strategy Session, one of the most important charts right now is the Copper/Gold ratio as its intermarket implications span far and wide.

As the chart shows, Copper's performance relative to Gold has been highly correlated with the US 10-year Treasury yield over the past couple of years. Copper outperforming Gold tends to occur in an environment where interest rates are rising, which we've seen over the past several months. While underperformance from Copper often coincides with falling rates.

So, the resolution from the tight consolidation in the Copper/Gold ratio could indicate the near-term direction of interest rates.

A breakdown in the ratio followed by lower rates would call into question the global growth/reflation narrative, as well as everything it entails, including the recent rotation into cyclical areas of the market, like Energy and Financials.

Now, the market hasn't provided any information to change our current thesis. We still believe we are in the early innings of a bull market in both equities and commodities and that markets are just digesting gains within a larger uptrend.

However, if Copper starts to break down relative to Gold, that is a cautionary sign we can't ignore.

So, even if you don't directly trade futures, it's a good idea to know what's going on in Commodities.

Thanks for reading, and let us know what you think, and be sure to check out this week's Commodity Report!