Five Charts that Make the Case for a Bull Market in Commodities

A year ago, as the economy was emerging from its third slowdown following the financial crisis, commodity prices looked set to move higher. However, due to the pandemic lockdown, the global economy abruptly fell into recession and commodity prices quickly collapsed. Today, business activity is back in recovery mode and commodities are surging and once again, poised to take advantage of improving conditions. We see five independent areas providing evidence of a commodity bull market. They are, commodities themselves, the economy, and the bond, stock and currency markets. Let’s consider them in turn to see if this time commodities can fulfill their promise.

Commodity Indicators

Chart 1 features the Pring Turner Commodity Barometer, a consensus indicator comprising commodity and inter-asset relationships. It generates bullish signals (a green highlight in the chart) with a 50% reading or more. Between 1956 and 2019 it returned an average monthly annualized gain of 8% when positive, compared to the buy hold approach of under 3%. Its current level just reached 100%, which is very bullish news for industrial commodity prices. In that respect, the arrows tell us when the Barometer first reaches 100% in a new cycle, it’s usually a signal that a strong advance is likely to follow. The dashed blue arrows remind us that this is not a fool proof approach. However, only one signal, that triggered in 1992, can be said to have been unprofitable. The others were more or less break even. Obviously, this track record does not ensure a robust commodity rally, but it does point up that such an outcome is certainly probable.

Chart 1 CRB Spot Raw Industrials and the Commodity Barometer

The Commodity Barometer defines favorable or unfavorable environments for commodities and is currently at the maximum 100% reading!

Source: Martin Pring’s Intermarket Review (click chart to enlarge)

Industrial Commodities and the Economy

Swings in the economy do not reflect exact changes in the demand for commodities but they do serve as a proxy. The current inflationary phase of the business cycle is consistent with the positive Barometer reading. In that respect, Chart 2 shows us that the price oscillator for the Chemical Activity Barometer, a leading economic indicator published by the American Chemistry Council, has turned sharply higher. We particularly like this one, because its history can be traced back to the 1920’s. Changes in the demand/supply relationship for chemicals, which are high up in the supply chain, add an ingredient not included in other popular leading economic indicators. The eleven vertical green lines tell us that, when momentum has bottomed from a sub-zero position in the past, a significant commodity rally or extended trading range has usually followed. The two red dashed ones over the last 65 years point up the false positives. This indicator has been rising sharply since the late spring. The CRB Spot Raw Materials Index has responded with a decisive penetration of its 12-month moving average (MA) and 2018-2020 down trendline.

Chart 2 CRB Spot Raw Industrials versus Chemical Activity Barometer Momentum

This leading economic indicator is signaling a new economic expansion has begun and commodity prices are likely to continue rising.

Source: Martin Pring’s Intermarket Review (click chart to enlarge)