The Return of Global Inflation: The Return of Value-Level Analysis In Global Commodities??

I have taken a hiatus from this blog for several months, shifting my focus from just commodity options to a more wide-ranging scope. The market suggested I make this shift, and I also am hopeful you like what I write so much–because of its detail and intelligence–that you will want to subscribe to my research on a regular basis (See Contact Page & About Us for more information). I hope you enjoy this new subject matter.   –Mike Zuzolo, President

The re-emergence of stronger factory data recently in the U.S., Europe, and China–coupled with a behavioral shift in FED monetary policy as well as more turbulence in the Geo-political sphere–historically speaking can be macro factors which help span a medium-term shift in investor sentiment. That is, away from deflationary expectations and back toward more inflationary (or at least reflationary) expectations. Are we on the verge of a more “virtuous cycle” in commodities? I think the case can start to be built.

1. Copper futures are breaching 3-year price levels while gold futures are once again approaching $1350/ounce: could these important leading indicator in the commodity sphere be signaling a medium-term shift in the “commodity cycle”–suggesting an end or a bottom in the “bear” cycle/downturn? Yes, I think we are starting to see an overall shift in the financial markets where the commodity market in general is starting to assume a more balanced relationship between supply & demand; and that in some cases, such as the agriculture sector, supply is no longer able to outpace demand in the world. I’ll build a better case for this in my next post, but I want to address a “Missing Link” in all this: the lack of volatility. And this shouldn’t be a surprise to you if you’ve read some of my older blog posts.

If we take a look at the chart here, which I’ve overlaid the CBOE Volatility Index (which represents the “fear” in the S&P 500 equities), versus the US Dollar Index (which represents an inflationary bias in the market). 090617_VIXDollarChart

There is an important feature this chart shows, in fact there are a couple I’d like to point-out before closing this blog post: (1) First, we need to remember that a weakening US Dollar represents an inflationary sentiment, because the cost of goods in dollar terms is going down, and this means buying-power for US-Dollar denominated goods is going up. With this in mind, note that in years when commodities have been strengthening–such as 1995- 1996, 2005-08, and 2010-2013–we see that both the VIX & the US Dollar Index are on the low-end of their historical ranges. Currently, while we have the VIX in this situation, the US Dollar remains elevated historically speaking. (2) This brings me to the US Dollar and where it is currently at:  very near a crucial break-out point of .92 or 92.00 on this chart (left axis). In other words, we can see a general trend where if the US Dollar is below 92.00, the commodity rally potential seems to increase. And the contrary is apparently the case in many instances…such as right now. We see the US Dollar “attacking” its 92.00 support…even though the FED is normalizing policy.

In Part 2 of this blog I’ll address the FED policy in the context of the agriculture sector, the sector I spend most of my time involved. In the meantime, I’ll leave you with another chart to ponder below: the Monthly Bloomberg Grain Commodity Sub-Index Chart with major cycle lows. Stay Tuned…Until Next Time!

090617_BloombergGrainIndexDisclaimer:  Please be sure to read the disclaimer each and every time you read one of my blog posts. Commodity trading involves substantial risk of loss and the prospect of prices already factoring-in cycles or current events should be considered.