Smart Money

Are commodities waking up?

By: Marc Cuniberti
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Simply put, commodities are the things that the things we buy are made of. They include items such as certain food stuffs, fuels, metals and precious metals. You might assume that a booming economy would increase demand for commodities. It seems a logical conclusion but the fact remains sometimes it does and sometimes it doesn’t.

Look at the stock market since 2010. Although measured by the Dow Jones Industrial Average (DJIA) which has more than tripled from late spring 2009 to where it is today, these basic items called commodities have languished. In a Feb 20, 2017 article by Forbes entitled “Commodities have been down for so long …” author Daniel Fisher summed up the stark reality of commodities performance by saying “The U.S. Commodity Index Fund, not surprisingly, has a five-year record of negative 8.4 percent a year.”

This would cause some to ask: Why, if the market has been rising for so many years, are commodities not participating in the increase?

That was a question I answered in my Dec. 13, 2017 article entitled “Commodities — Is the rally for real” which basically put forth the argument the stock market rally might not be because of the increased demand for stuff, but rather just an increase in the demand for stock ownership.

Fast forward to today and in taking another look at commodities since that article hit the newspapers, there is indeed some signs that the bungee-cord type of relationship between the stock market and commodities might finally be reaching its snap-back point.

In a recent article by Greg Guenther entitled “Revealed: A New Commodity Rally has Arrived,” the argument is made that commodities may finally be being pulled upward by real demand from manufactures who in turn are responding to a real increase in demand by consumers buying more stuff.

Adding to that argument, note that energy prices have popped higher in April along with the gold whose price is stealthily approaching its January 2018 highs. The next milestone for gold so says Guenther, is its next stop of the July 2016 high of $1,377 an ounce. Meanwhile, Guenther also notes that shares of companies that mine the metal have yet to confirm an upward trend and therefore commodities in general.

The industrial metal copper also plays an important part to trying to predict where things might go or so some analysts believe.

Dr. Copper as copper is sometimes called for its purported relationship to future market movements is also rising and testing its January highs. It is believed by some that copper, being used in many an industrial application, and will rise in price as industrial products become more in demand. Copper, or so it is thought, can therefore sniff out a coming rally in the stock market.

Copper popped 3 percent on April 20 causing those that believe Dr. Copper is indeed a precursor to market movement to sit up and take notice.

As indicated in my above referenced December article on the validity of the stock market rally and its relationship to commodities, I am of the opinion that if this market rally is for real, the rise in commodity pricing will eventually have to follow.

Only time will tell if Dr. Copper will continue its ascent and follow the recent rise in the energy and gold sectors, but if not, it won’t be the first convincing head fake that fools those believing in such relationships and it likely won’t be the last.

Once again we realize hindsight is foresight and only in hindsight will we know if recent price increases in certain asset classes are indeed telling us which way the general markets will go.

Keep in mind no one can predict future market movements with certainty and that includes Dr. Copper and its followers or any other asset class one may tend to look at.

This article expresses the opinions of Marc Cuniberti. Cuniberti is an investment advisor representative through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Contact him at MKB Financial Services 164 Maple St #1, Auburn, CA 95603, 530-823-2792. MKB Financial Services and Cambridge are not affiliated. His website is California Insurance License # OL34249. The referenced indexes may not be invested in directly. This is not a solicitation to buy or sell securities.