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Commodity Investors: It's Time to Look Beyond the Fed

The new commodity "bull" run is not a result of loose monetary policy; but rather, of a bullish Elliott wave pattern

by Nico Isaac
Updated: June 09, 2016

From doom-and-gloom -- to -- boom! Since plummeting to the abyss of a 13-year low in January, the Bloomberg Commodity Index rocketed 21% to enter official "bull market" territory on June 6.

In fact, everywhere you look from grains to metals, energy to meat, the commodities complex has risen from the ashes of a gut-wrenching four-year long bear market.

So, the question is: How did commodities get their groove back?

Well, according to some experts, a major catalyst for the commodities' comeback is the Federal Reserve's ongoing commitment to keeping interest rates at record lows.

From a June 6 Bloomberg article:

"The odds for a [rate] increase in summer fell to 22% after rising past 50% last week. Commodities benefit from lower U.S. interest rates as investors seek higher returns from riskier assets."

So goes a key tenet of mainstream economic wisdom: The commodity sector sets and rises according to monetary policy. You've heard of daylight savings time. Well, this is a kind of "rate"-light savings time --

The Fed raises rates, commodity prices fall back. The Fed cuts rates, commodities spring forward.

So, what's wrong with this logic?

Well, in our opinion, a couple of things. First, if maintaining a loose monetary policy is good for commodities, then why did the market crash 60% in 2008 -- the same year the Fed slashed rates seven times to record low of 0-.25% while launching the first round of quantitative easing?

Chalk it up to a glitch, perhaps?

Not likely. Because in 2011, as the Fed was smack dab in the middle of injecting a few trillion more dollars into the U.S. economy via QE 2 and QE 3 -- and the Fed interest rates flat at a historic 0% -- the Thomson Reuters CRB Index peaked and turned down in the four-year long, 30%-plus bear market we see today.

Two years into the commodity selloff, our November 2013 Elliott Wave Theorist put the fallacy of a Fed-led market to bed:

"Charts tell the truth. Notice the four short arrows on the chart. Based on their positions, you might think they would mark the timing of accurate sell signals generated by a secret indicator.

"But there's no secret indicator. These happen to be the times at which the Fed launched its inflationary QE programs!"

Investors believed the Fed's QE actions would be bullish for commodities. But -- ironically yet naturally -- every launch of a new QE program (coupled with zero % interest rates!) provided an opportunity to sell commodities near a high.

None of the believers in omnipotent monetary authorities and their pledges to inflate saw any of those changes coming. And now that commodities are again on the upswing, from an Elliott wave perspective, we couldn't see how it could turn out any other way.

Case in point, in the December 2015 Monthly Commodity Junctures, senior analyst Jeffrey Kennedy identified a mature, five-wave decline on the CRB Index's daily price chart. By the rules and guidelines of Elliott wave analysis, the battered sector was set to enjoy a powerful comeback:

"I think the entire commodity complex as a group is at a pivotal juncture...and we're very near completion of move to the downside [which began in 2010].

"So the bottom line I think 2016 is going to be a very exciting year for anyone who invests in commodities. As we move into the first quarter of 2016, I'm going to be looking for significant lows to form." 

The next chart captures the CRB Index's rally to 10-month highs amidst an across-the-board commodities comeback:

 

What's next for commodities?

Investors would be wise to look beyond the Fed for the answer -- to the Elliott wave pattern underway on the price charts of every major raw materials market.

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