Continuous Commodities Index breaks out from 6-month base

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machinehead's picture
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Continuous Commodities Index breaks out from 6-month base

Early this month, the CCI (Continuous Commodities Index, also known as the 'old CRB index') broke out from a 6-month base. I use the CCI as a reference because it is well balanced among agricultural and industrial commodities, metals and energy. The 'new CRB,' by contrast, is too heavily weighted in energy for my taste, as is the Goldman Sachs Commodity Index (GSCI).

The CCI plunged along with stocks in late 2008, falling through 380 in mid-October, and reaching a nadir around 325 in early December. This year, it repeatedly banged up against resistance just above 380, but didn't break out. But during the past five trading days, the CCI has broken out to a 6-month high with solid momentum. Here is the chart --

Why is this happening? Here are some possible reasons:

1. Fed rate cuts which began in Sep. 2007 are finally taking effect.

2. U.S. dollar weakness has been evident in recent days.

3. After an initial plunge on the Fed's announcement that it would buy Treasurys, yields on the benchmark 10-year note have risen above 3 percent, which in turn is pushing up politically-sensitive mortgage rates. If the Fed attempts this caper again, the results could be even more inflationary in the second round.

4. As promised during his campaign, Obama is escalating the war quagmire in Afghanistan. War is always, invariably an engine of inflation.

5. Sharply reduced investment in energy exploration and agricultural fertilization and planting, which serve to reduce productive capacity, may have launched the next commodity price cycle.

Take your pick. Was Dec. 2008 'the' bottom in commodities? No one knows. But I'd put the odds better than even that it was. You have been warned.




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