Commodity Indexes Hint Return of Inflation
Nusbaum, David, Modern Trader
Commodity prices have hit rock bottom. Do 1993's early gains represent a true turning point, or even (gasp) inflation?
People are starting to talk.
First, eyebrows raised when the Consumer and Producer Price Indexes (CPI and PPI) posted ostentatious gains in January and February. Next, the dependably moribund Commodity Research Bureau (CRB) Futures Price Index broke out of its trading range. Then, while the Goldman Sachs Commodity Index (GSCI) retained its composure, gold started a ruckus, reaching $350 an ounce.
Much ado about nothing? Federal Reserve Chairman Alan Greenspan said as much in April.
"The very steepness of the Treasury yield curve reflects deep-seated investor concerns that inflation will significantly quicken in the latter part of this decade," he said. "The recent firming in some materials prices has more to do with improving demand and the restoration of more normal levels of profit margins than to the early signals of sustained inflationary pressures."
But could it -- inflation -- come sooner rather than later? Have commodity prices truly bottomed, with nowhere left to go but up?
Being a bit of a contrarian, Trends in Futures Editor Glen Ring says he loves how "everybody tells us inflation is not a problem. What better way to have a two-tiered situation, where industrial inflation will stay down -- in other words, finished product inflation -- (while) raw inflation, raw inputs go up, and producers are caught in the middle?"
While consumers don't have the buying power to drive up prices, Ring says, commodity prices have hit a 12-year bottom and are due to rebound.
"204.50 is the major support now in the CRB," Ring says. "I believe that will hold. Now the key will be to bring the CRB back above 214 on a weekly close to confirm that long-term trend change is occurring."
If that happens, Ring says the CRB should rally for 12 to 18 months, possibly 24, and challenge 1988 highs (in the 272 area).
Jack Schwager, director of futures research at Prudential Securities says he's seen "more than enough evidence to assume we've seen a bottom (in the CRB)."
"My assumption is the downtrend in commodity prices that began in 1980 ended February 1993, until proven otherwise," Schwager says. "I would define (proven otherwise) as the CRB going below the 204 level for a week or longer."
Schwager cites six main reasons why commodities are becoming attractive:
1 Commodity prices have gone down in an economy that still witnesses inflation year-to-year. In inflation-adjusted terms, commodity prices are extraordinarily low.
2 Commodities, as an asset class, are extraordinarily low relative to other asset classes such as stocks and bonds.
3 Many indicators, like money supply or the strength of the dollar, are either neutral or pointing to higher inflation.
4 The CRB Index technically has hit a low -- "only slightly above the past 20-year low, virtually giving back the entire commodity price spiral we saw from 1977-80" -- held at support and turned up.
5 Many long-term commodity charts are near lows or at least near long-term ranges.
6 Individual charts, such as gold, are showing technical signs of bottoming.
While James Grant, editor of Grant's Interest Rate Observer, has no idea what price the CRB is going to hit, he thinks "it's going to be significantly higher."
"The stated international policy of the administration is devaluation," Grant says. "The stated domestic monetary policy is the expansion of bank credit. The stated fiscal policy is one of tax increases and increases in mandated costs to business. …