From the Desk of Ian Culley @IanCulley
The big news in commodities this week is gold breaking down to its lowest level since early 2020.
I recently outlined what a downside resolution for the shiny yellow rock could mean for inflation and the entire commodity space.
Spoiler alert: a fresh leg lower from gold doesn’t bode well for raw materials or the prospects of sustained inflation.
Nevertheless, inflation hasn’t gone anywhere, at least not yet.
As long as that’s the case, we expect commodities to see further upside, albeit not in unison. The broad rally witnessed at the end of 2020 into 2021 is unlikely to be repeated in the near future.
Regardless, stellar buying opportunities will present themselves.
We aren't going to let the bifurcated nature of commodity markets stop us from catching the next explosive rally.
In other words, the supply and demand dynamics for copper don't affect our decision to trade soybeans or wheat.
Instead, let's trade what is in front of us – even as concerns of a global economic slowdown accentuate differences among the various contracts.
Just look at a year-to-date performance chart of commodity subgroups:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2022/09/RelativeComparison.png)
Energy is an obvious outlier. It’s been our focus in recent months, given its relentless strength and resilience under increased selling pressure.
While we don’t want to get long at current levels, it’s definitely not an area we want to short.
The remaining space is in the same ballpark. The year-to-date performance of the five subgroups (precious metals, base and industrial metals, grains, softs, and livestock) fall within a range of roughly positive or negative 12%.
And so far this year, the most economically sensitive group finds itself on the lower end of the range.
Base and industrial metal contracts have taken the brunt of the selling pressure. These commodities are at the mercy of larger economic forces and are therefore more adversely affected by recessionary fears.
On the other hand, contracts less affected by interest rates and prospects of economic growth (such as ags) continue to post positive returns. People have to eat!
The overlay chart of the equal-weight base metal and the equal-weight grain indexes reflects this disparity:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2022/09/EWGRAINSINDEX.png)
Base and industrial metals are well below their late 2021 lows as grains hold above comparable levels. And as grains dig in and carve out a tradeable low after bottoming in July, base metals continue to print fresh lows.
With heightened fears of slowing growth, it makes sense for defensive areas such as grains and ags to offer the best long opportunities.
While commodities remain bifurcated, you want to lean on agriculture and other pockets of strength and stay away from the weakest subgroups.
The caveat here is you shouldn’t rush out to buy corn and soybeans hand over fist. Instead, you have to remain open to the possibility of the ag subgroups catching lower to metal contracts.
At the same time, you want to keep an eye on these contracts and their relative strength. This is especially true right now, as they have a seasonal tendency to bottom in the fall.
Stay tuned for a deep dive into the grain contracts and their associated ETFs in the coming weeks.
COT Heatmap Highlights
- Commercial hedgers reduced their long exposure to crude oil yet hold near a three-year extreme.
- Commercials turned up the heat in gold as they carry one of their largest long positions in three years.
- And commercials added more than 9,000 contracts to their long cocoa position to reach a new three-year extreme.
Click here to download the All Star Charts COT Heatmap.
Thanks for reading! As always, please let us know what you think.
And be sure to download this week’s Commodity Report below!
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