The biggest, strongest trend this year has been the rise of commodities.
It’s been the biggest as seen with the CRB Commodity Index rising 26% this year – a full 10% more than the Nasdaq.
Everything has been working in favor of commodities – from supply shortages to a seemingly over-accommodative Fed.
The supply shortages have been paired with a demand boom providing even more support for prices.
This kind of broad-based trend is something investors can consistently lean on. Which means every minor pullback can be seen as another buying opportunity for certain commodities…
Using these pullbacks as a buying opportunity makes sense. Especially with demand only set to rise once spending from the $3.5 trillion infrastructure bill starts trickling through the economy.
As it happens, we’re seeing a pullback right now.
A big part of it has been due to the energy sector. Broad-based commodity indexes have their biggest exposure in energy. Some account for over 50% of the index.
So, when energy falls, it can drag down other commodities with it.
For example, a combination of a seasonally weak period, overbought conditions, and a slowdown in Asian air travel has all led to the recent selloff.
Not only that, but we have a strong dollar, and iron ore prices have collapsed 33% since July. Even ETFs like Invesco Optimum Yield Diversified Commodity Strategy (PDBC) and the iShares GSCI Commodity Dynamic Roll Strategy (COMT) are down around 9% from their recent highs.
That’s why I’m still not bullish on the energy sector.
But one subsector does stand out to me, and that’s metals – especially platinum and copper.
Metals have been hit particularly hard lately. The peak of that selloff coincided with gold’s flash crash just a few weeks ago. And while gold has already recovered all of its losses, other metals haven’t yet recovered.
However, that could soon change as prices are signaling that at least a near-term bottom is in for the other metals as well.
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The Downside Is Limited From Here
If we look at the risk and the return for platinum and copper, I believe that both have limited downside.
The demand for both platinum and copper is outpacing supply. This creates a natural price floor for commodities in general.
According to the World Platinum Investment Council, platinum demand will continue to outpace supply this year with 8.04 million troy ounces needed and only 7.88 million in new production. Compared to last year, that’s about a 10% increase in demand with a slight decrease in supply.
Take a look at this platinum chart… it shows prices finding support from the recent selloff at pre-pandemic highs of around $1,000/oz…
And according to Bloomberg, it’s the same story for copper – which continues to be in a deficit since the pandemic began. The demand is higher than supply by about 200,000 metric tons.
Take a look at how copper just bounced right off its 200-day moving average (MA)…
These technical setups are usually good for about a 5%-10% bounce in the near term. In summary, we’ll watch both these commodities. At current levels, they could soon provide a good opportunity for a short-term trade.
Beyond that, there could be something there for longer-term traders or investors too.
But for that, we’ll have to depend on the speed of the infrastructure bill providing a longer-lasting spending uptick, increased demand, and therefore, higher prices.
Regards,
Eric Shamilov
Contributing Editor, Market Minute
Reader Mailbag
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