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Sunday, November 18, 2012

Are Commodities in Bear Grip? Not Really!

Sometimes I think financial analysts are really hired just for showing lot of worry and concern on TV every morning. Analysts world-over are worried about Commodity prices from 2011 onwards, citing recession in Europe, in USA and in China, which is a great guzzler of commodities like Copper. However, unlike 2008, where commodity markets fell off the cliff in just a few months, last two years of slowdown has almost done nothing to ease commodity prices. This is despite everyone being very bearish on commodities and commodity stocks. We see TV anchors talking about great impending slowdown in commodities from past two years on a daily basis. But is it really this bad, or this is another case of everyone being bearish, except the one who matters - Mr. Market. We need to look at data and figure out if commodity prices are indeed softening or this is just a consolidation phase for the next up-leg in commodity markets.



Please have a look at five year chart of S&P GSCI. GSCI is a commodity spot index which tracks 24 commodities and raw materials and is a gold standard in commodity trend analysis. Unlike in 2008, where Index fell from 873 to 350 odd levels in a matter of 4 months, GSCI has been in a downward sloping wedge or a flag kind of formation from April of 2011 to this date. In 2008, the crash was 65% from the peak and since last two years, GSCI fall is only about 15% down from peak of 750. Downward sloping wedge is often a bullish pattern, where price can break upwards with significant volumes and indicates temporary pause of bull trend, and is not a bear pattern.

Commodity prices on Indian MCX exchange has not softened at all. This is also because of weak INR currency and India being net importer of commodities, but also because bear trend in commodity prices is not really visible on charts. Lets look at some weekly charts and figure out.



Dr. Copper had a bad year 2011 and has seen lows of 330 in 2011. Since then Copper has recovered and is hovering around 420 levels, which is only marginally down from peak of 465. Right now, Copper is showing higher bottom on weekly chart, and anyone shorting Copper from last one year on Indian markets would have lost money. 


Aluminium is in consolidation as well, with current price of 107, not far off from the peaks of 125 the metal saw in April, 2011. The downward wedge is again apparent here, and signals that Aluminium is consolidating and looking for the next push up.


Zinc has not gone anywhere, and would have given tough 3 years for both Bulls and Bears. The commodity is in range of 115 to 90 from past 3 years. However, no downtrend is visible for Zinc as well from these weekly charts.


Lead is range-bound as well, from lows of 95 to highs of 120 in past two years. Lead is showing higher bottoms in last few weeks and can sprang surprises on anyone shorting Lead aggressively. 


And finally, Crude Oil, of which India is a huge importer. Crude has moved around in range of 4500 to 5500 from last one year, and in last few months has found support on 4500 levels. 

Hence, looking at broad spectrum of Commodities on Indian markets, commodity players or commodity stock investors need not be unduly worried. Commodity markets are hyper sensitive and any impending doom would have crushed the markets by now. Markets are alive and kicking in consolidation mode, which indicates that all analyst worries may be resolved without impacting commodity prices drastically. Maybe, this can turn out to be a good opportunity to pick commodity stocks at lower levels. 

Thanks for reading this article and keep writing in to us.

2 comments:

  1. Hi ,
    Thanks for this informative article.
    In a recent interview,the big bull Mr.Jhunjhunwala said he is bearish on commodities and india is going to be a great beneficiary of the fall in commodity price and one of the reasons for the mother of all bull market he is been predicting.
    Whats your say on this?

    Thanks.

    ReplyDelete
  2. Thanks Bunny. Analysts are very bearish on commodities, but charts are not. So, because of this bearishness, commodity stocks may correct heavily and there may be a opportunity to own good stocks at value prices. That's the message here.

    ReplyDelete

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