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Commodities Heating Up?

This week is pivotal as another round of earnings will be released. On Wednesday, the July FOMC minutes will come out. Most expect a Fed hike of 75 bps, but there are talks of a hike of 50 bps instead.

Talks are circulating that Chairman Powell may move to a less aggressive rate hike stance as early as the next meeting. Will this trigger the next commodities rally?

Commodities have come under intense selling over the past few months. Are these short-term corrections within longer-term structural bull trends? Will the commodities super-cycle resume?

The following are things to watch to determine if commodities will heat up:

  1. The rapid and sharp rise in interest rates has begun to slow. For example, the 10-year US treasury yield (TNX) appears to have peaked near 3.25-3.5%. A head and shoulders top warns of a near-term top. Violation of neckline below 2.71-2.75% confirms a breakdown and signals a TNX correction of -0.775 to 1.93-1.97%. Lower interest rates will help to contain rising inflationary pressures.

  2. A stronger US Dollar has hurt commodity prices because dollar-denominated commodities are priced higher for non-US buyers. However, a top in the US Dollar can lead to the commodities market bottoming and resuming its longer-term bull trend.

  3. Geopolitical turmoil remains challenging. The Russia/Ukraine War, the middle east debacle, and China. The war between the West and Russia continues to pressure global commodities.

  4. Oil remains in short supply. China, India, and other emerging countries continue to be avid consumers of raw materials.

  5. Constraints and bottlenecks remain firmly entrenched within the global supply chain. Given the multifaceted nature of supply chain bottlenecks, the issue will continue indefinitely.

  6. Nominal economic growth and rising inflation continue to gain traction. If the US economy does not slip into a recession and inflation does not subside, the stagflation cycle strengthens further.

  7. If stocks struggle further and slip into a structural bear, commodities can be a defensive hedge against rising inflation and provide diversification against future market volatility.

  8. Gold has been trading sideways trading range. If gold rebounds from nr support, this signals the start of the next bull cycle in commodities.

  9. WTI Crude Oil and other commodities such as agriculture and industrial metals have been in sharp corrections. If oil and gas resume their uptrends, this can trigger a broader-based commodity rally.

Rising interest rates and the recent strength in the dollar contributed to commodities selling. Also, the aggressive Fed rate hikes have triggered a sharp drop in commodities, as fears of a policy mistake have caused gold to plummet from a high of $2,079 (3/8/22) to a recent low of $1,678 (7/21/22). Although CPI reached a 41-year high of 9.1%, it is not likely to sustain at this accelerated pace.

Commodities near an inflection. The outcome of the test of supports will decide the next directional trend.

Gold support is 1,672-1,678 (Jun 2020, Mar/Aug 2021, and Jul 2022 lows).

WTI Crude Oil’s pivotal support rests near the low-90 to mid-90s (Nov 2020 uptrend and 200-day ma).

Copper’s crucial support remains at 3.13-3.32 (61.8% retracement from the 2020-2022 rally and Nov 2020 breakout).

Agriculture Fund ETF (DBA) nears critical support at 19.23-19.50 (38.2% retracement from 2020-2022 rally and Nov 2021 breakout).

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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