Commodities are starting to come back strong. We talked about the strength in the commodity-related stocks on Monday, and perhaps it is appropriate that we talk about the commodity market as an asset class.
It looks to us like the primary long-term bull market for commodities is getting back on track, and we could be looking at another leg to the upside for hard assets. The driver behind this renewed strength has to be strong global growth. Outside of the self-inflicted financial crisis that we're currently suffering through (along with the collateral damage that was thrown Europe's way), the rest of the global economy is doing just fine.
China isn't missing a beat and continues to consume at a voracious pace. The Baltic Dry index continues to surge higher as shipping rates to Asia for bulk commodities, such as iron ore, continue to rise. This is not a sign of weakness, and the ground work is being laid for a resumption of the bull market in commodities. Oil is the most important commodity, and it pushed out to new highs north of the $80 mark Tuesday.
United States Oil ETF
Geopolitical concerns are the latest driver, but now that the $80 barrier is broken we believe that the trend can easily continue to the $100 level very quickly if there is any sort of supply disruption.
streetTRACKS Gold ETF
Gold has also broken out and is resuming the long-term uptrend. We like gold as a hedge against the global inflation story. The growth in Asia is industrial-based, and growth in these economies will have a direct inflationary effect as the consumption of commodities accelerates.
Copper and the rest of the industrial metals have been weak recently, but we can see from the chart that the uptrend remains intact, and copper looks to us like it is forming a large consolidation formation. A move over $3.80 would be a breakout and suggest copper is going much higher.
Powershares DB Agriculture ETF
The agricultural commodities are joining the party as well. Wheat has surged higher since June, as supply tightens and global demand for food increases.
Traders can take advantage of these trends by buying a basket of commodity-based ETFs. Traders can use the
United States Oil Fund
ETF as a proxy for oil, the
streetTRACKS Gold Shares
ETF as a proxy for gold and the
Powershares DB Agricultural Fund
as a proxy for agricultural commodities. These funds should cover the majority of what is happening in the commodity market and should give traders another avenue of exposure to the global growth boom.
While we worry about recession in the domestic economy, the rest of the world that didn't buy subprime mortgages is getting back to the business of growing. The global economy remains strong and Asia continues to be the growth engine for the world, including us. We see the commodity bull market resuming and possibly taking the commodity-related stocks along with it.
At the time of publication, John Hughes and Scott Maragioglio were long United States Oil Fund ETF and the streetTRACKS Gold Shares ETF. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.