Trader’s Corner — Commodity Supercycle

In today’s Money Weekend…just getting started…yield curve steepening…gold looking shaky…the opportunity…and more…

I have been writing to you about the upturn in commodities for months now. Last month I pointed out that oil was bouncing out of a multi-decade support zone and looked like it was heading much higher.

A few months before that I pointed out the spike in battery metals which has continued to today.

Is it too late to jump on the bandwagon?

In the short term, perhaps yes. But there are signs that the trend to the upside may just be getting started.

My article from a couple of weeks ago pointed out that a few stocks were starting to look overheated. I used Pilbara Minerals Ltd [ASX:PLS] as an example and the stock remains about 23% below where it was when I warned you against chasing the momentum.

But the big picture remains bullish for commodities and battery metals in particular.

Marko Kolanovic, the JPM quant who is well respected in the market, came out during the week with a prediction that we are in the early stages of another commodity supercycle.

The key points he mentioned that could drive commodities much higher were:

Yield curve steepening

We are seeing a steady rise in yields at the long end of the yield curve with inflation breakevens also rising to multiyear highs.

The 10-year US bond yield has risen from 0.5% around the middle of last year to 1.16% and there is no sign that the uptrend has ended.

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US 10-year bond yields

If yields keep rising at the current pace there will come a time when stocks will be forced to sit up and take notice.

That moment hasn’t come yet and the rally in everything continues. But it pays to keep one eye on the bond market while contemplating how your portfolio looks going forward if commodities and yields keep moving higher.

Inflation may be incredibly low, but it looks like some big players in the market are starting to position themselves for higher inflation down the track.

I don’t think gold is the right commodity to enter as an inflation hedge right now. The technical picture looks a bit dangerous to me. I think gold needs a solid clear out of positions before it will be ready to rally again.

Rising bond yields are currently working against gold rather than helping it.

If gold falls below the recent low of US$1,764, I have a target of US$1,610 which is the buy zone of the most recent wave higher.

Gold looking shaky

The opportunity

But other commodities look incredibly strong.

Most have already had a strong move as I mentioned above, and they may need a bit of a breather before heading higher.

But oil continues to gather momentum while oil stocks lag behind. Oil prices have jumped another 10% over the last month, but Woodside Petroleum Ltd [ASX:WPL] and Oil Search Ltd [ASX:OSH] have fallen around 10% in that time.

Perhaps there are plenty of disgruntled shareholders in both stocks that are happy to hit the sell button on any strength.

Whatever the reason, if oil prices continue to grind higher and selling pressure continues in WPL and OSH they are going to start looking pretty cheap. They could be a great addition to a portfolio looking to hedge against rising yields and inflation.

If Kolanovic is right and we are in the early stages of a commodity supercycle then a rotation into unloved energy stocks can’t be too far away, and when the buying begins it will be hard to get on.

Regards,

Murray Dawes,
For Money Weekend