The last half of 2011 was unkind to the commodity market bulls, after the first half of the year showed so much promise. In April, the Continuous Commodity Index (CCI) scored a new all-time record high for its present iteration. The CCI is a basket of 17 major raw commodity futures prices rolled into one composite price index, and is an excellent gauge of the overall price trend in the raw commodity sector.
In May, the CCI started to decline and continued its slide into the end of 2011. In mid-December, the CCI notched a fresh 14-month low. Indeed, the commodity market bulls have taken a beating the past six months.
What has been frustrating to many commodity market bulls is the fact that commodity traders and investors have been focusing more on price action in the key "outside markets" in the past several months than on the supply and demand fundamentals of the individual commodity markets. The major outside markets affecting the raw commodity futures markets are the U.S. dollar index and the U.S. stock indexes. The U.S. dollar index is a basket of six major world currencies weighted against the greenback.
The stronger U.S. dollar index in recent months has been a bearish weight on the commodity markets for two main reasons. First, most major commodities are priced in U.S. dollars. When the dollar appreciates in value against the other major currencies, commodities become more expensive to purchase with those other currencies. That means less demand for those commodities outside of U.S. borders. Second, speculative traders in the past few years have purchased commodities as a hedge against a weakening U.S. dollar. This market play was at its peak in 2008 when crude oil prices surged to near $150 a barrel.
However, many commodity markets are now value-buying opportunities, and major market lows are in place or close at hand for many commodities.
From a technical perspective, veteran commodity market watchers know the keen cyclical nature of most raw commodity markets. In other words, they go through periods of boom and bust on a regular and nearly predictable basis. If the history of commodity market price action plays out, once again, the late-2011 bust in commodity markets will very likely lead to a 2012 boom.
From a fundamental perspective, even stronger evidence suggests that commodity markets will see resurgence in 2012. In recent weeks, the U.S. economy has seen generally improving data released to suggest the world's largest economy (and biggest commodity consumer) is back on track. China's economy is humming along at an annual growth pace of 10% -- give or take a percentage point or two. China is a commodity-consuming juggernaut that can and will continue to take credit for the recent boom in commodities that has driven many individual commodity markets to all-time record highs the past couple years.
Another bullish fundamental for the commodity markets is that traders and investors will likely start to focus more on supply and demand fundamentals in individual commodities (and less on the key outside markets) if worldwide economic conditions continue to improve.
In the unlikely event the recent price downturns in commodity markets continue into the first quarter of 2012, it would be an ominous signal for all traders and investors. A continuing weak commodity sector would hint the European Union sovereign debt crisis continues to fester or has even escalated to the point of creating another EU economic recession. If commodity prices remain weak it would also suggest the U.S. economy is stalling again and may be heading for another recession.