Which of These Three Leading Commodity Indicators are Forecasting Higher Prices?

We hear a lot about inflation these days and have certainly experienced rising grocery bills, as well as runaway used car and housing prices. Commodity prices are often, but certainly not always, a leading indicator for the CPI, but there are three markets that have a useful, though imperfect, record of leading them. These are gold, the Canadian Dollar and lumber. Let's take a closer look at each one.

Gold

Gold has long been thought of as a hedge against inflation; Chart 1, which compares the CRB Composite to the gold price, demonstrates that point. The arrows indicate that turning points in gold generally take place before those for the CRB. The angle of their slope reminds us that the lead time varies quite a bit. Also, the CRB led gold at the 2011 peak. Fast forward to the current situation and we find that gold topped out last August, as the CRB has been advancing.

Chart 2 argues that gold is likely to move even lower, as the price has just edged through a major up trendline. The Special K, which you can read about here, has already violated its bull market trendline, crossed decisively below its signal line and just completed a head-and-shoulders top. The rising short-term KST in the lower window argues that the break in the price could turn out to be a whipsaw. However, as it stands right now, it looks like gold is headed lower. Given its historical lead relationship with commodities, the message is that the current CRB rally may be limited in scope.

Canadian Dollar

It is generally accepted that the US Dollar Index and commodities move in opposite directions. Most of the time, that is certainly true. At present, the Index looks as if it is in the process of reversing from a primary bear to bull. That would be confirmed if it can build on the recent breakout, as shown in Chart 3. This would require a decisive penetration of the 65-week EMA that can hold. The small arrows indicate 65-week EMA crossovers have offered timely and reliable signals of important trend reversals in the last few years. Other things being equal, such a signal would be a negative development for the CRB.

The Canadian dollar has an even closer relationship with commodity price swings than the Dollar Index. The arrows in Chart 4 show that, at important turning points, the currency usually has a slight lead over the CRB. When it does not, it is usually a coincidental relationship. The green- and red-dashed arrows also point up that divergences between the currency and the CRB are usually resolved in the direction of the currency.

Chart 5 further underscores the close relationship between the currency and commodity prices, as the four KST buy signals for the dollar are all followed by some sort of an advance in the CRB. The red sell arrows were also followed by commodity weakness. Two exceptions, flagged by the dashed arrows, tell us that negative momentum loses its power in a really strong market. At the moment, the KST is bullishly above its MA. However, it has begun to flatten, which could be the precursor of something bigger.

Chart 6 indicates that things have already started to deteriorate, as the both the currency and its Special K have violated their 2020-2021 up trendlines. All is not completely lost, as the currency has not yet dropped below its 200-day MA. Neither has the Special K crossed below its signal line.

Lumber

The price of lumber is very sensitive to housing developments. Housing is a very long leading economic indicator due to its interest rate sensitivity. That means that lumber has a tendency to move ahead of commodities in general. Chart 7 compares the lumber price to the CRB Composite as well as their two long-term KSTs. The red and green arrows connecting the peaks and troughs of these two series show that, in most situations, lumber momentum leads the KST for the CRB. It's not a perfect relationship, as occasionally there is no connection between the two. Also, the leads can vary from cycle to cycle. However, the recent lumber KST peak does suggest that the CRB rally may be limited from here.

Conclusion

The CRB Composite, whilst overextended on a primary trend basis, is nevertheless above its 12- and 24-month moving averages and, therefore, in a positive trend. That said, three markets that have a reasonably accurate record in foreshadowing swings in commodity prices are currently moving in the wrong direction. That's not to say that they can't soon turn around. However, at this point, it is certainly worth raising the question of why we should expect higher commodity prices when these bellwethers are pointing in the opposite direction.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.