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Seeing Dramatic Gains Ahead For Commodities

Summary

We're seeing significant rallies.

Is it all about the dollar?

Central banks are cautious.

The greenback's decline could spell trouble.

Looking at higher highs ahead, but not necessarily for the reasons you may think.

Many investors and traders consider commodities an alternative asset class. Towards the latter part of the great bull market cycle in raw material prices that began in 2003 and ended in 2011/2012, these assets moved to the mainstream. However, by the end of 2015, after four straight years of lower highs and lower lows they once again became alternative as everyone tends to love the bull market and run from the bear.

The interesting thing about commodities is that all of us, around the world, are consumers. We eat bread, consuming wheat. We fill our automobiles with gasoline or diesel, consuming crude oil. We cool and heat our homes consuming natural gas. We drink coffee, sometimes with sugar, and both are soft commodities. We adorn ourselves with jewelry, consuming gold, silver, and platinum. We turn on the faucets in our homes to let the water flow from pipes, often made of copper. We slap a steak, burger or ribs on our grills, making us consumers of animal protein. We put dressing on our salads, consuming soybean oil. The list goes on and on, but I think you get the idea; commodities are part of our daily routines. As buyers of these commodities all the time we not only have sensitivity to price but a deep innate knowledge of history. We notice if prices go up or down. We have a closer connection with commodities in our daily lives than we do with other investment assets like stocks, debt or currencies.

At the beginning of 2016, commodities remained mired in a bear market. However, the raw material markets changed in the middle of February as commodity prices staged impressive rallies.

Significant rallies

The first commodity to move, the leader of the pack in 2016, has been gold. While other commodities waited until January and February to make lows, gold charged higher out of the gate in 2016 after making lows at around $1046 in late November 2015. Gold was down over 10.4% in 2015. However, it did not take long for gold to make back all of those losses in 2016.

As the daily chart of COMEX gold futures highlights, the yellow metal moved to highs of $1306 on May 2 before retreating to the $1291 level. The increase of almost 25% from the late 2015 lows has been impressive. The rise in open interest, the total number of open long and short positions in COMEX gold futures contracts provides technical support for the move in gold. A monthly chart of the gold price highlights just how important and spectacular the move has been on a longer-term basis.

Gold reached highs of over $1920 per ounce in 2011, since then it had made lower lows and lower highs. However, in 2016, that changed, and the monthly chart illustrates that the momentum of gold is now higher for the first time in years. Additionally, the rising open interest equates to the highest level since 2010 at over 569,000 contracts. In 2010, gold was on its way to all-time highs.

Other precious metals have gone along for the ride with gold. Silver traded at lows of $13.635 in mid-December 2015, it traded to highs of $18.06 last week and remains over $17.50 per ounce. Open interest on the silver futures contracts on COMEX was recently at all-time highs. Platinum traded down to $812.20 in early January, last week it traded over $1090 and closed last week at the $1082 per ounce level. It is not only precious metals that have been lustrous over recent weeks and months. Copper traded to lows of under $1.94 per pound in January. The red metal traded to highs over $2.30 per pound in March and closed last week at around the $2.15 level, in the middle of the trading range. At the same time, aluminum, zinc, nickel and tin traded on the London Metal Exchange are all higher than at the end of 2015.

Energy markets have taken off. The price of crude oil...


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