Commodities should be a great buy.
Base metals, precious metals, and energy commodities have been hammered over the past few years.
Meanwhile, the most voracious commodity-consuming industries are doing exceptionally well.
Aircraft sales are at record levels and orders for around $1 trillion more are on the books waiting to get filled.
Domestic auto sales are on pace to pass 17 million this year. That’s up 80% from 2009 levels. And, as long auto-lending bubble keeps ballooning, they’ll keep going up.
Even Whirlpool (WHR) is doing well. It’s set to post $21 billion in sales this year. That would surpass its previous $19 billion peak sales set at the top of the housing bubble in 2007 when demand for new washers, dryers, and refrigerators was soaring.
These industries are massive consumers of base metals and energy commodities and they’re rocking.
Despite all that though, commodity prices have been unable to buck the downtrend.
Well, until recently that is.
Over the past two weeks, commodity prices have been rebounding sharply. Investor interest is coming back right along with prices too. And we have to ask...
Is this the beginning of a new bull market in commodities? Is it time for commodities to rise another 50% to 100% across the board as they have twice in the last decade and create more than a few 100% to 1000% winners in mining and other commodity sector stocks?
Well, here’s one simple and proven way to know if and when it’s time to get back into commodities.
The Ultimate Leading Indicator of Commodity Prices
Right now it sure looks like commodities are on the path to recovery.
The S&P Goldman Sachs Commodities Index (GSCI), which includes everything from aluminum to zinc, is up 8% in just the last two weeks.
It’s one of the strongest moves in a long time for a sector where the downtrend has been relentless.
The chart below of the GSCI shows just how bad the the last few years have been for commodities (source):
That’s pretty bad. It’s even worse considering how well stocks have done over the same time period.
Of course, this is exactly why we’re talking about commodities today.
They’re cheaper than they have been in years. And they will go for another big run, eventually.
The question is when will they make that move? That’s where this indicator of true commodity comes in.
The indicator which has preceded every commodity bull market is called the Baltic Dry Index (BDI).
The BDI tracks the real-time cost to ship mainly commodities like semi-refined base metal ore, grains, and the like.
For potential commodity investors, looking for a way to separate all the noise of a volatile commodity price from real underlying demand, the BDI works really simply too.
When the BDI is up, demand for commodity shipments (and therefore demand for commodities) is up.
When the BDI is down, demand is down.
Best of all, the BDI has consistently and accurately predicted both bull runs in commodities over the past decade.
Take a look at the chart of the BDI over the past 10 years (source) to see what I mean:
As you can see, the BDI has led the two most recent commodity bull markets.
From 2005 to 2008 the BDI was high and rising. Commodity prices were soaring at the time.
Between 2009 and 2011 the BDI was consistently elevated. Commodity prices were steadily rising over that period too.
Right now, however, the BDI is low. It hit a 29-year low this summer near 700. It has recovered a bit to around 800. But the it’s still low.
And that’s the absolute key here.
The low BDI signals to me the current commodity uptick will likely be short-lived.
There, of course, will be a few standouts in commodities. There always are.
Coffee is poised to make a good run soon.
Livestock too. Meat prices tend to run in cycles as short as two or three years. So depending on where they’re at in the cycle cattle or hogs can do really well.
Overall though, the low BDI indicates sustained commodity demand is not as high as it needs to be for a big run-up necessary to really drive commodity stocks higher.
So right now commodities may have bottomed. But there’s a real probability this spike is just another head-fake rally like we’ve seen many times over the past couple of years.
I’m personally waiting for confirmation before jumping back in. The BDI will provide that confirmation.
After all, I’d much rather wait to see a significant rise in the BDI, know there’s a big run coming, and maybe miss out on the first 10%-20% of the run than take the huge risks of trying to pick the absolute bottom.