AGRICULURAL COMMODITIES JOIN COMMODITY RALLY -- COFFEE AND SOYBEANS NEAR UPSIDE BREAKOUTS -- LUMBER SETS NEW RECORD
COMMODITY RALLY CONTINUES... Previous messages have pointed out that a two-year low in the U.S. Dollar Index was helping to lift commodity prices. And that's still the case. Chart 1 shows the Invesco Commodity Index (DBC) moving further above its 200-day moving average. Most of those messages, however, have focused on upturns in industrial and precious metals which are continuing and, to a lesser extent, energy prices. Today's message will focus more on agricultural commodities which are also turning up.
AGRICULTURAL INDEX IS TURNING UP... Chart 2 shows the Invesco Agricultural Fund (DBA) trading above its 200-day moving average for the first time in six months. It's the latest of the commodity groups to turn up. The large green volume bars over the last two weeks suggest that investors are starting to take this group more seriously. The DBA includes grains, soft commodities, and livestock markets. The agricultural group is often driven by weather (which affects crop sizes), and trade considerations (like Chinese buying of grains and livestock). Like other commodities, ag markets also benefit from a falling dollar which makes their exports more attractive to foreign buyers. Ag markets are also part of the commodity complex which has been rising over the past few months and starting to attract more investor attention. The Fed's willingness to tolerate higher inflation numbers may also be helping pull more money into that asset class. The same is true of stocks tied to those commodities.
COFFEE AND SOYBEAN NEAR UPSIDE BREAKOUTS... Chart 3 shows the price of coffee (through yesterday) in the process of testing its March high. A close above that chart barrier would signal a bullish breakout in that commodity. Chart 4 shows soybeans challenging their January high yesterday. Both commodities are part of a broader advance in grains and soft commodities. Their rally adds to the general view that commodities as a group are in the early stages of a more lasting upturn. That has inflationary implications because commodities represent the first stage of the inflationary cycle (raw materials) which can eventually feed into producer and consumer prices.
LUMBER SETS NEW RECORD... Gold isn't the only commodity to hit a new record. The monthly bars in Chart 5 show the price of lumber surging to the highest level on record. A big part of that big advance is a booming housing business in the states which is being driven by record low mortgage rates and lack of supply of existing homes. That creates a big demand for construction of new homes which requires a lot of lumber.
METALS UPDATE... Gold and silver have been consolidating within existing uptrends and are gaining back some lost ground this week. The price of copper has risen to the highest level in two years. That's having a positive impact on stocks tied to those metals. Another two-year low in the dollar is supporting higher commodity prices.
