Raw Commodities Could See a Boost

 | Sep 20, 2011 | 12:00 PM EDT
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The raw commodity market sector has seen some general price weakness the past three weeks, amid concerns regarding a worldwide economic slowdown and the festering European Union (EU) debt crisis.

The Continuous Commodity Index (CCI), which is a basket of 17 major raw commodity futures prices rolled into one composite index, hit a fresh six-week low on Monday. The CCI is presently in danger of falling below strong technical support at its August low, which would then put the index at a nine-month low.

However, Tuesday finds the commodity sector in a general price rebound. The market place is now focused on the two-day meeting of the U.S. Federal Reserve's Federal Open Market Committee. Many believe the results of the FOMC meeting will be commodity-market bullish. If the Fed does indeed make another monetary policy stimulus move by purchasing more longer-term U.S. debt (called a "twist") in an effort to keep U.S. interest rates very low for an extended period of time, then it can be argued that  hard assets like raw commodities will see price appreciation. Reason: Not only would such a Fed move keep the pinch on U.S. Treasury yields and other interest rates, which are a competing asset class with commodities, but it would also suggest the U.S. dollar would remain in a weak position against its major counterparts. With a fresh monetary stimulus plan, the Fed would ostensibly be printing more greenbacks. Recent history has shown a lower-valued U.S. dollar on the foreign exchange market correlates with higher commodity market prices.

The European Union debt debacle has de-escalated just a bit early this week as it appears Greece will obtain its latest tranche of debt repayment funds from the EU. The EU debt crisis has in recent weeks has injected keener uncertainty into the commodity markets, which has produced a bearish "when in doubt, get out" trader and investor mentality for most of those markets. If the EU debt situation can at least stabilize in the coming weeks, then the commodity markets, in general, should see fresh investor buying interest emerge.

The commodity market bulls can also argue that despite the shaky major world economies, the overall supply-and-demand scenarios for most commodity markets tilts in favor of the bullish camp. China has the past few years become a major (and still growing) force in the raw commodity market place. With a gross domestic product growth of around 10% a year, China has been and will continue to be a voracious consumer of raw commodities.

All of the above argues that dips in commodity market prices will likely continue to be value-buying opportunities for investors. As has been the case for some time now, crude oil will continue to be a leader of the raw commodity sector. As goes crude oil prices, so will go most other raw commodity prices. At present, Nymex crude oil futures prices have been trending gently higher for six weeks.



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