Let’s dive in and see what’s going on in the space! We also need to check in with a key intermarket ratio, revealing where we want to position ourselves in the coming months and quarters.
Check out the triple-pane chart of the Bloomberg Commodity Index $BCOM, the CRB Index, and our equal-weight index comprised of 33 individual contracts (EW33):
The EW33 remains resilient despite the BCOM and the energy-heavy CRB recently posting fresh 52-week lows. Its buoyancy speaks to lingering strength in various contracts such as orange juice, cocoa, sugar, live cattle, precious metals, copper, and steel.
But the environment is changing as yields begin to turn lower. I find it hard to imagine that commodities – at the index level – will continue to trend higher as rates fall.
That doesn’t mean we need to steer clear of these assets completely. Rather, I think it’s time to give energy and other procyclical contracts a well-deserved rest while rotating into an undervalued asset group.
The crude oil/gold ratio agrees:
The overlay chart of this key ratio and the 10-year yield illuminate how to approach commodities as rates catch lower: Buy gold!
The US 10-year yield practically moves tick for tick with crude relative to gold.
It’s simple: As rates rise, the procyclical behemoth (crude oil) does well. On the other hand, gold and other precious metals enjoy a bid as yields fall.
We’ve often said “the dollar and real yields will act as the catalyst for the next secular bull run in gold.”
You know we like precious metals as evidence supporting our bullish thesis mounts.
But that doesn’t mean crude can’t dig in and catch higher – or that commodities are a no-touch as rates fall.
To be clear, we remain in an inflationary environment. Pockets of strength will continue to exist for raw materials as long as that remains true.
Regardless of the economic backdrop or market environment, we always want to buy the strongest and sell the weakest.
Gold’s the clear winner when it comes to commodities and falling rates.
