Several Intermarket Relationships are Signaling Danger for Commodities

When considered in their own right, commodities, as represented by the CRB Composite, are in a primary bull market. Chart 1, for instance, shows that the Index is above its 12- and 24-month moving averages and the long-term KST is also in a bullish trend. That said, this momentum indicator has reached the red overbought level. Apart from the notable advance in 1974, merely reaching the overstretched zone has consistently indicated the terminal phase of a bull market. That in itself suggests that most of the juice has already been squeezed out of the post-April 2020 bull market. However, there are some other indicators derived from intermarket relationships that offer a better-than-50/50 chance that an intermediate correction, at the very least, is in the wind. These relationships involve gold bonds and the stock market. Let's consider them each in turn.

(Before we do, please note that, in all these charts, solid arrows represent successful signals and dashed ones false negatives or positives.)

Gold vs. Bonds

Chart 2 focuses on the relationship between gold and bonds and what that is saying about the likely trajectory for commodities going forward. Gold tends to discount future commodity price inflation and bonds deflationary trends in financial markets. When gold is outperforming bonds, that is generally bullish for commodities and vice versa. Determining when these changes in trend are about to take place is the tricky part, but applying a long-term KST seems to do the trick. The arrows in Chart 2 show that, when the KST for the Gold/30-year Bond ratio bottoms out, there is a strong possibility that commodities will rise. For example, since 1993, there have been ten such buy signals, only one of which could be deemed a failure.

Chart 3 shows the sell signals where the 9:2 ratio favoring successful ones also puts the odds in the indicator's favor. The KST has begun to roll over for the twelfth time and has tentatively crossed below its MA again.

CRB vs. the Inflation/Deflation Index

Chart 4 compares the CRB to my Inflation/Deflation Index, which you can read about here. Briefly, it consists of the ratio between an index of S&P industry groups that are sensitive to commodity price swings and another that encompasses groups that tend to benefit from a deflationary environment, when interest rates are falling. It's really the stock market's way of anticipating periods of inflation and deflation.

Most recently, the ratio bottomed in September of 2019 and the CRB followed suit in March of 2021. The Index has yet to register an identifiable peak, but the ratio topped out in the summer of last year. It looks as if that will be the high for the cycle, as the ratio is now well below its 12-month MA. Moreover, the long-term KST begun to drop below its 9-month MA. Unfortunately, the lead given by the ratio varies considerably. But given the stock market, through this relationship, has been forecasting a CRB high for well over a year, it's probably not that far away.

Gold vs. Commodities

Gold discounts future commodity price inflation to the extent that, when it finally starts to underperform commodities, they tend to rise. Conversely, when the price of the yellow metal starts to outperform, commodities tend to fall.

A 15-month ROC of this CRB/Gold relationship has been plotted  in Chart 5. An elevated plot means that commodities have been outperforming gold and vice versa. In that respect, an initial reading above the red line indicates that gold has spent enough time discounting lower commodity prices, so it's about time that the forecast become reality with weakening commodity prices. These instances have been flagged with the vertical lines. This underperformance by gold has consistently been followed by declining commodity prices, so a recent jump to a record gold underperformance offers a definite bearish warning that a downside commodity reversal is likely.

None of these relationships on their own has a perfect track record.  However, when considered as a consensus, they offer a very powerful message that commodities could be closer to some kind of peak than most would suspect. Incidentally, you can update these charts by simply clicking on them.

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 Group of Walnut Creek or its affiliates.