Bespoke Investment Group

Bespoke's Commodity Snapshot

Below we highlight our trading range charts for ten major commodities.  The green zone represents between 2 standard deviations above and below the commodity's 50-day moving average, and moves above or below the green zone are considered overbought or oversold. 

As the dollar has risen in recent days, most commodities have pulled back quite a bit.  As shown, oil has pulled back sharply from the top of its trading range to the middle of its trading range.  Gold and silver have moved down to the bottom of their trading ranges, while corn and wheat are now below the green zone.  Platinum has also pulled back, but it's still closer to the top of its range than the bottom.  Natural gas hasn't gotten hit as hard as other commodities, and it is actually up a bit today.

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Commodity Prices and The Consumer

Since the start of 2010, the rally in commodities has been a boon for companies and investors in the Energy and Materials sectors.  Consumers, on the other hand, are increasingly feeling the impact on their wallets.  In the chart below we have calculated the cumulative daily price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) since the beginning of 2008.  We then multiplied the changes by the annual per capita consumption of each item.  When the line is in positive territory, commodity prices are acting as a tax on consumers, while readings in negative territory are indicative of a windfall for consumers.  Although this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers' wallets over the last 24 months.

As shown in the chart, the rally in commodities in 2008 was especially painful on consumers.  During the Summer of 2008, commodity prices were acting as a $4.77 per capita daily tax on US consumers versus the start of the year.  When the credit crisis escalated, commodities tanked, thus erasing the entire tax (and then some) on consumers.  By the time commodity prices bottomed in early 2009, US consumers were now benefitting from nearly a $5 daily windfall due to the decline.  Since commodity prices bottomed early last year, however, that windfall has been slowly dwindling away.  While US consumers are still benefitting from lower commodity prices compared to the start of 2008, the windfall is less than 30% of what it was nearly a year ago.

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Bespoke's Commodity Snapshot; OJ Spikes

Below we highlight our trading range charts for ten major commodities.  For each chart, the green zone represents between two standard deviations above and below the commodity's 50-day moving average.  Moves above or below the green zone are considered extremely overbought or oversold. 

As shown in the first chart, orange juice has spiked above its trading range in recent days as Florida freezes.  OJ has been in a strong uptrend since the middle of 2009, so traders seem to have expected the cold, cold winter that the US has seen so far.

Most commodities are trading at or near extreme overbought territory at the moment.  Both oil and natural gas are right at the top of their trading ranges, and the same goes for platinum, copper, and corn.  After moving down to the middle of their ranges at the end of 2009, gold and silver have had a strong start to 2010 as well.

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Gold: What a Difference a Month Makes

Less than one month ago today, the price of gold was trading above $1,200 per ounce, and hitting record highs what seemed like every day.  Since then, the fortunes of gold have reversed dramatically.  After breaking below its 50-day moving average before Christmas, gold attempted to rally back above that level on Monday but was quickly met with additional selling.  Today, however, gold is making another run at the 50-day after failing to make a new low yesterday. 

Is this another dead cat bounce? Or is gold getting back on track?  What do you think?

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Oil Inventories Working Their Way Back to Average Levels

While they are likely to remain above their long-term average for the rest of the year, oil inventories have been dropping like a stone in recent weeks.  This week, stockpiles fell 4.8 million barrels, marking the third straight week where inventories declined by more than 3.5 million barrels.  While inventories were running more than 20 million barrels above normal at the start of the quarter, current levels are now less than 6 million barrels above average.

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Natural Gas ETF (UNG): Heads I Win, Tails You Lose

While the shortcomings of ETFs that track commodities have been well documented, the discrepancy between the price of natural gas and the ETF that is meant to track its price provides a great reminder of why many of these more exotic vehicles should be avoided.  As always, investors should know what they own and look into these vehicles before investing in them. 

The chart below compares the YTD performance of the front month natural gas futures contract and the United States Natural Gas Fund (UNG).  Through the end of August, natural gas and UNG were both down similar amounts and had tracked each other relatively closely.  Since then, however, natural gas has made a major reversal and is actually up on the year.  UNG, on the other hand, remains down over 55%.  In essence, UNG holders have missed out on the entire rally.

While the explosion in popularity of ETFs has had many positive effects and created numerous efficiencies for investors, the boom in the industry hasn't been void of some individual busts.

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Three Week Losing Streaks in Gold

After three straight down weeks, the price of gold isn't showing any sings of rebounding today.  The current streak represents the sixth three-week losing streak for gold since the start of 2008.  As shown below, based on the five prior periods, the fourth week hasn't been especially strong.  While gold has been up during the fourth week three times, the average return has been a decline of 0.26%.

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Energy Inventories Down More than Expected For the Second Straight Week

While oil was in the midst of a 10-day losing streak over the last two weeks, its price wasn't the only thing declining.  For the second straight week, the DoE announced that crude oil stockpiles declined by over 3.5 million barrels, and in both weeks the draw-down has been greater than expected.  Today's news has helped to boost the price of oil by over $2.  Crude oil inventories remain well above their historical average for this time of year, but they are near their lows of the year.  For bulls on the Energy sector, inventories are moving in the right direction.

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Oil Inventories: Down More Than Expected, But Still Above Average

This morning's release of the weekly oil inventories from the Energy Information Administration (EIA) showed that crude stockpiles decreased by 3.8 mln barrels compared to expectations for an increase of 500 thousand.  Even though the draw-down was much larger than expected, the price of oil as well as energy stocks are struggling today.  One reason for the weakness is that current levels of oil inventories are still 13 million barrels above their long-term average for this time of year.  So just to get back to average by the end of the year, we would need to see a weekly decline of more than 4 million barrels.  Given that there are only six other weeks this year where inventories declined by more than four million barrels, it seems unlikely that we will see this for the next four weeks.

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Bespoke's Commodity Snapshot

Below we highlight the year-to-date performance of ten major commodities.  While gold is currently grabbing the headlines, it's actually up the least out of the seven major commodities that are in the black this year.  As shown, Copper is up the most with a gain of 126.7%.  Orange juice is up the second most with a gain of 83.3%, while oil, silver, and platinum are all up more than 50%.  Coffee and gold are both up about 30%.  Three commodities are down in price in 2009 -- wheat (-20.27%), corn (-17%), and natural gas (-11.6%).

Below we provide our trading range charts for the ten commodities listed above.  The green shading represents between two standard deviations above and below the commodity's 50-day moving average, and moves outside of the green zone are considered overbought or oversold. 

Currently, oil, natural gas, corn, and wheat are trading in neutral territory.  The precious metals have all seen sharp pullbacks over the past couple of days, but they are still closer to the top of their ranges than the bottom because of the sharp increases they've seen in recent months.  For gold to reach oversold territory, it would need to drop nearly $200/ounce.  Finally, the breakfast drink commodities -- coffee and orange juice -- are both in strong uptrends and are trading right at overbought territory at the moment.

 

Another Month, Another Century Mark: Gold Closes in on $1200

Japan's pledge of a new round of quantitative easing to weaken the yen has caused another push into hard assets by investors.  As a result, the price of gold touched $1,200 per ounce overnight.  If it seems like gold was pushing through $1,100 just last month, it was.  Some may look at this run by gold as a sure sign of a bubble.  While the short period of time between $1,100 and $1,200 (22 days) seems fast, there have been other periods where the price of gold eclipsed century marks in shorter periods of time. 

The chart below shows the amount of calendar days that transpired between century marks for the price of gold.  For example, after closing above 200 for the first time on 3/6/78, gold didn't close above the $300 mark for another 459 days (6/8/79).  However, after closing above $300 for the first time, gold breezed through five different century marks over a span of only 223 days.  In January 1980, the price of gold closed above $700 on January 15th, and then closed above $800 two days later! 

And keep in mind that with each successive century mark, the percentage rally required to get to the next hurdle declines ($300 to $400 equals a 33% gain, while a rally of only 9% is needed to get from $1,100 to $1,200).  If the price of gold were to stage a rally similar to the one in 1979, $1,200 gold would seem like small peanuts.

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Gold Closing in on 20% Above 200-Day Moving Average

Gold's move over the past couple of months has been pretty incredible but not without precedent.  As shown in the first chart below, the most recent leg up for gold has put it at 19% above its 200-day moving average.  In the second chart, we highlight the historical 200-day moving average spread for gold.  As recently as 2006 and 2008, the 200-day spread moved well above 25%, and back in 1980, the spread briefly got up to 136%!  Gold is definitely overbought right now, enough so that the risk/reward tradeoff in the short-term is probably favoring the risk side.  However, it has gotten much more overbought in the past than it is now, so it could still go higher before correcting.

 

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Crude Oil Inventories Back on the Upswing

After last week's much larger than expected drawdown in oil inventories, this week's report showed a partial rebuild.  While the consensus forecast was for a build of 1 million barrels, the actual increase was much greater at 1.762 million barrels.  As a result crude oil prices are getting whacked with oil trading down more than $2.  Heading into the coldest part of the year, oil inventories remain well above their historical average.

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Gold Up Eight Days in a Row

With all the hoopla surrounding gold recently, it should come as no surprise that the commodity is currently riding an eight-day winning streak.  The current run represents the seventh time since 1980 that gold has had a streak of eight or more consecutive days with a gain.  As shown below, the only time one of these streaks went for more than eight days was back in 1982 when the ninth day was also positive (on the tenth day it fell 5.7%, or $63 in today's prices).  Looking out over the next week, there has been little consistency in the results as periods of negative and positive returns have been evenly split. ,

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Gold Compared to Silver and Platinum

Gold has been the talk of the town recently, with everyone wondering if the current rally is a bubble waiting to pop or just the beginning of a run to much higher prices.  While gold is getting the attention, its sister metals -- silver and platinum -- have actually been outperforming.  Below we provide historical charts of the ratio between gold and silver and gold and platinum.  When the line is rising, gold is outperforming, while gold is underperforming when the line is declining.  As shown, late last year both silver and platinum lost big ground to gold, with platinum and gold even reaching parity at one point.  During the metals rally this year, however, silver and platinum have actually done better than gold.  (See SLV and DBS for silver ETFs and PTM for a platinum ETF.)

Bespoke's Commodity Snapshot

Below we provide our trading range charts of ten popular commodities.  The green shading represents between two standard deviations above and below the commodity's 50-day moving average.  As shown, oil has been trading at the top of its trading range for a few weeks now, and its uptrend remains intact.  Natural gas has also made a nice move over the past couple of months, but it has struggled to make the next leg up over the past few weeks. 

As investors know, gold is currently the commodity of the day, and as shown in its chart, it is currently trading right at overbought territory.  Silver and platinum have rallied along with gold, but they don't quite have the relationship with the dollar that gold has, so investors haven't plowed into them as much.  Corn, wheat, orange juice, and coffee have also all done well recently.

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S&P 500 Priced in Gold

With equities correcting over the last few weeks and gold rallying to record highs, the price of gold has once again exceeded the price of the S&P 500.  It now takes 0.96 ounces of gold to buy the S&P 500.  This is considerably less than the long-term average of 1.74 since 1980, and a far cry from July 1999 when it took over 5.5 ounces of gold to buy the S&P 500.  The question now is, if gold eclipses 1,100, will its time above that level be as brief as it recently was for the S&P 500?

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Crude Oil Inventories Show a Sharp Decline

Oil is getting a boost this morning following the weekly EIA inventory report which showed that crude oil stockpiles decreased by 3,963K barrels (expectations called for a build of 1,500K).  At a time of year when stockpiles are typically rising, today's inventory decline came as a big surprise.

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Gold Soars to New Highs

The price of gold has broken out to another new high this morning following news that India's Central Bank purchased 200 tons of the metal from the IMF.  Previously, the IMF had announced that it would sell around 400 tons, raising speculation that the planned sale would cause a glut of gold in the market.  Based on India's $6.7 billion 200-ton purchase, the market may have an easier time digesting the increased supply than previously thought.  The average price per ounce for the Indian Central Bank's purchase works out to around $1,045.  With gold now trading at $1,079, they have already made $218 million (3.25%).  Not bad for a few days work!

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Crude Oil Inventories Rise Less Than Expected

This week's report on Energy Inventories from the EIA showed a smaller than expected build in crude oil stocks (778K vs. 1910K forecast).  Gasoline and distillate stocks, however, posted larger than expected builds.  In addition, even though the build in crude oil stocks was less than expected, current levels are well above their historical averages.  While oil prices were down heading into the report, prices have dipped further following the release.

 

Gold Analysts Are Far From Gold Bugs

Below we highlight a price chart of gold since the start of 2008 along with the median price estimates of gold analysts across Wall Street going out to 2013.  The price estimates shown are quarterly through the first quarter of 2011, and then yearly from the end of 2011 through the end of 2013.  Based on these estimates, gold analysts don't seem too worried about a falling dollar and rising inflation. 

Their current estimates for the end of 2009 are at $960, and they get up to $1,000 by Q3 2010 before progressively dropping all the way down to $800 by the end of 2013.  This isn't to say that there aren't analysts expecting gold to be higher than it is now in the coming years, but the collective estimate is currently for the metal to head lower.

 

Bespoke's Commodity Snapshot

Below we provide charts of ten major commodities.  In each chart, the light green shading represents two standard deviations above and below the sector's 50-day moving average.  As we all know, gold is all the rage right now and oil has taken a back seat.  As shown in the chart of oil below, it has basically gone nowhere over the last two months.  It is currently trading right in the middle of its trading range. 

Natural gas, on the other hand, has made a significant move higher and broken its long-term downtrend.  With gold charging higher, silver and platinum have also moved up, but they haven't broken to new rally highs yet.  This is a key signal that the gold move is pretty much based solely on the dollar's move lower. 

Looking at the rest of the bunch, copper has actually been trending downward, corn has bounced nicely recently, wheat is close to oversold levels, and coffee and orange juice are in neutral territory.

 
 
 

Price of Gold in Dollars (Record High), Euros (-10%), and Yen (-10%)

The price of gold closed at record highs today exceeding $1,040 per ounce throughout the day.  While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros and Yen.  As shown in the charts, the price of gold is up considerably over the last five years, but the recent run has only been strong in dollar terms.  This indicates that the strength is solely a function of a weaker dollar rather than any real pickup demand.

 
 
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Crude Oil Inventories Continue to Rise

This morning's release of the weekly energy inventory report from the Department of Energy showed that crude oil inventories increased by nearly 2.8 million barrels, which was 1.8 mln barrels more than expected.  With inventories up by 2.8 million barrels for the second month in a row, they remain well above their historical average.

Oil to Natural Gas and Platinum to Gold Ratios

With oil's decline and natural gas' rise over the past few weeks, the ratio of oil to natural gas has declined quite a bit.  As shown below, the oil/natural gas ratio hit a 20-year high recently as natural gas collapsed.  The ratio is still very high compared to historical levels, but it is down from 27 to 17 since the start of the month.

The platinum to gold ratio has also begun to reverse the downtrend it had been in since early 2008.  At the end of 2008, gold actually traded above the price of platinum, bringing the ratio below 1 for the first time in years.  With the economy getting back on track, platinum has outperformed gold, and the ratio is back up to 1.28.  This is still, however, far below the range that the ratio was trading in throughout most of this decade.

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