Commodities are hot again

Courtsey news via MarketWatch by Michael Kahn, Jan. 3, 2011

NEW YORK (MarketWatch) — Deflation may be the talk of the town, but don’t tell that to the commodities markets. Despite pullbacks last month, a smorgasbord of commodities from copper and coffee to oats are at or near 52-week highs.
What’s going on? Many would like to credit a weak U.S. dollar. Since most commodities are priced in dollars, if it goes down in value it takes more of them to buy the same amount of commodities. The price by definition goes up. But the dollar was relatively unchanged last month after rallying off a rather solid support level in November. We have to conclude that there was actual rising demand for commodities, making prices go up no matter what currency is used to buy them. Perhaps it was fears over continued sovereign-debt problems in Europe. Or maybe it was money rotating out of bonds. Whatever reason the pundits would like to cite, the fact, not opinion, is that the original formulation of the Commodities Research Bureau index of 17 commodity futures traded above its 2008 peak level before December ended (see chart).
This index is more diverse in weighting than its replacement, the Reuters Jefferies CRB index, as the latter is more heavily skewed toward energy markets. I liken it to the “new Coke” of indexes as the original worked well for many decades without need for change. Let’s refresh our memories about what was happening in the second quarter of 2008. The most significant, as well as anguish-inspiring, was crude’s peak at $147 per barrel. “Evil speculators” had driven the market to insane heights, and we were paying $4 per gallon at the pump.

Gold had just reached $1,000 per ounce for the first time before backing down. Corn dragged all the grains into the stratosphere thanks to misguided love for ethanol. Even cotton was trading at what was then multiyear highs. It was no wonder the old CRB index, now called the Continuous Commodity index, had shattered its previous all-time high after tripling since 2001. But when the economic crisis of 2008 ballooned, demand for commodities plummeted and so did the CRB index. More than few politicians, I am sure, applauded the speculators’ pain. Over the past two years, however, commodities began a quiet comeback. Precious metals ran back into the record books led by sizzling silver. Grains plodded along until exploding higher in June. Sugar, cotton and even lumber all moved significantly higher, and the old CRB index already is back to its lofty 2008 levels.
To be sure, the ride was bumpy and November took down most commodities quite sharply as the media once again trumpeted the bursting of a bubble. December recoveries left patterns on the charts that were not consistent with burst bubbles. Indeed, the old CRB index merely corrected down to its rising 50-day moving average the way bull markets are inclined to do.
As of this writing in late December, the index was poking its head above resistance from both its November high and 2008 peak. Indeed, chart watchers may have labeled the pattern as a “cup with handle,” a bullish pattern with a colorful name. The theory behind it is that a peak is followed by a pullback, a pause and then a recovery. That forms the cup. A new pause at resistance forms the handle of the cup. The next breakout, if it occurs, would be a fairly reliable buy signal.
For investors, playing commodities is often risky. But there are numerous exchange-traded funds and exchange traded notes available for individual commodities, such as gold, silver, oil, grains and cotton. I would advise reading their prospectuses carefully, however, as many are not as simple as stock-market ETFs with which investors may be familiar.
Michael Kahn writes the Getting Technical column for Barron’s Online , which analyzes sectors and markets twice a week.