It’s a tough time to be a commodity bull right now. You can still make money in commodities, of course, but it’s tough to do on the bullish side. Let me show you why with three charts.
First, crude oil …
You can see that crude oil has crashed through support from February and is now negative for the year. In the short term — barring some calamity in an oil-producing country — it’s not likely to go much higher than $97, which is a line of support-turned-resistance from February.
What’s driving crude oil prices lower? Two words: Abundant supply. OPEC recently announced that the cartel’s production is at the highest level since 2008, to 31.62 million barrels per day. This is thanks to increased production from Saudi Arabia, the recovery of the Libyan oil industry and increased production from Iraq.
And it’s not just OPEC. Production is higher from the U.S., Canada and Russia.
Those three countries alone have increased their production by 600,000 barrels a day year-over-year, according to OPEC’s figures. Heck, the U.S. is now exporting more oil than ever before.
Now, let’s look at a chart of copper …
They call this metal “Doctor Copper” because it takes the temperature of the global economy.
What do you think a chart like this says about the global economy? I think it says that the news from China, the “factory of the world,” keeps getting worse.
Last week, data out of China revealed that it experienced sharper-than-expected declines in retail and home sales, exports, investment and production in April. And though China’s industrial production rose 9.3% last month, this was down significantly from a nearly 12% increase in March and was the slowest annual rate in nearly three years.
I still think China could be in for a soft landing. But investors are taking the news very hard. And the People’s Bank of China just cut the reserve requirement ratio by 0.5 percentage points and that still didn’t help Chinese stocks much. That points to deeply negative sentiment, and more trouble ahead.
Add in a crisis in Europe that is bringing that continent to the edge of recession and a slowdown in America’s economic recovery, and copper may not have found its bottom yet.
Finally, let’s look at a long-term chart that brings the commodity crunch into focus — a chart of the Thomson Reuters/Jefferies CRB Index. This is a basket of 19 commodities, everything from energy (33% of the index weight) to aluminum, corn, hogs, gold and silver.
You can see that the CRB Index cracked multiyear support. This is partly because, stimulated by higher prices, producers of some raw materials have ramped up supplies enough to create a short-term glut. But it’s also because of very real worries about the global economy.
Not long ago, I was still pretty bullish about the global economy. But politicians in several key nations (including the U.S.) seem deadlocked into a stalemate of stagnation. I don’t think upcoming elections will solve the problem, either.
Meanwhile, the world’s central banks picked up the slack with an easy-money policy. In fact, China recently cut its benchmark interest rate by 50 basis points (half a percentage point).
But in Europe, that central bank seems fixated on austerity, even though unemployment rates in the PIIGS nations — Portugal, Italy, Ireland, Greece and Spain — are approaching or exceeding the 24.9% level that America saw at the very bottom of the Great Depression.
And in the U.S., the Federal Reserve has been sending out more mixed signals than a drive-through traffic school. I expect we’ll see more accommodative language at the Fed’s next meeting in June, but it’s anybody’s guess as to when we’ll see another flood of easy money.
Bottom line: Commodity prices are cheap, but they could get cheaper. I’m taking steps to add bearish or “hedge” positions in my publications. You might want to consider the same in your own portfolio.
And remember, if you do nothing else, cash is a position. You might want to raise cash, because the long-term fundamentals for commodities are still in place — I’m talking forces like a booming global population, urbanization and a much-needed worldwide infrastructure overhaul.
And that means we should be coming to a buying opportunity that will be as rare as it is packed with potential. You’ll want cash on hand for when that day comes, and you can pick up diamonds in the dust for pennies on the dollar.
All the best,
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