In the first phase of its bull market in the earlier portion of the last decade, Commodities began a bull market on the back of a falling US Dollar. The greenback declined while commodities, stocks, foreign currencies and even bonds rallied. The universal bull market could be better termed a dollar bear market. The movement of risk assets and especially commodities were, in most cases, hostage to the trends in the buck.
In 2010 a very important change in this relationship has gone unnoticed in financial circles. Commodities have risen on their own and largely without the help of a weak US dollar. Year to date the CCI (continuous commodity index) is higher by 19% while the US Dollar is higher by 3%.
In the chart below we plot the CCI and the inverse of the US Dollar in the top row. One can see the major divergence. The CCI has made significant new highs (in 2010) while the inverse of the US Dollar remains well below its late 2009 peak. Furthermore, in the lower row we graph the CCI against UDN, a basket of currencies that excludes the buck. That chart surpassed the 2008 high.
This begs the question, why the change?
While precious metals are the premier store of value, it’s important to remember that all hard assets can be a store of value. Investors are seeking stores of value as a combination of the actions of governments and immaterial economic growth has called into question the long-term viability of fiat currencies. Precious metals have been the leader but commodities are following suit, as is usually the case.
As the chart below illustrates, commodities have performed well against all assets and not just against ill-fated currencies. In recent months, the CCI has surged when priced against corporate bonds, treasury bonds and stocks.
Despite the clear resurgence in the commodities space, all we hear about from the mainstream press is the rebound in stocks. You’d think the S&P 500 was in some great bull market from all of this talk. Yes, stocks have rebounded tremendously but consider the following.
Gold is nearly 40% above its 2008 high. Silver is 36% above its 2008 high. The CCI is 3% below its high. The emerging markets ETF is 12% below its 2008 high. The S&P 500 is 21% below its 2008 high.
So while the James Altucher’s of the world are patting theirselves on the back for the S&P 500’s rally, they conveniently ignore the huge bull market in precious metals and commodities. Gold, Silver, and the commodities sector have crushed the S&P 500 in recent years and recent months. It’s great if you’ve made money in stocks, but they are a loser compared to the aforementioned bull markets.
