Guest Post: Are Commodities Topping Out?

Tyler Durden's picture

Submitted by contributor Charles Hugh Smith

Are Commodities Topping Out?

The past several years have seen a growing backlash against "paper" investments as more and more investors consider hard assets to be a safe haven against the implications of central bank money printing. But as the global economy visibly slows, this question arises in many minds: Are commodities, which have been on a tear since the March 2009 bottom, finally topping out?

The question requires both a fundamental economic response as well as a technical chart analysis.

We can start by observing the common-sense connection between demand for commodities such as copper, cement, steel,etc. and economic expansion. When demand rises faster than supply, prices rise. Since supplies of commodities face all sorts of restraints in terms of extraction rates, energy costs, and declining reserves, increased demand quickly pushes prices higher.

The Big Picture

As developing world nations such as China, India, and Brazil have expanded, their consumption of basic commodities has skyrocketed, pushing prices higher and stimulating exploration for additional sources of these materials.

Now there is evidence that these developing world economies are slowing, along with the developed economies of Europe, Asia, and North America.

If demand for commodities falls significantly while supply remains ample, then prices will soften. If demand continues to exceed available supply, then prices will rise.

In other words, there are two potential drivers of commodity prices: demand and supply. If supply of a specific commodity were to plummet due to geopolitical turmoil, its price could skyrocket, even in a recessionary environment of declining demand.

Absent a sudden drop in supply, however, a global recession would crimp demand, and thus commodity prices could be expected to fall.

So the question, are commodities topping out? boils down to the question, is the global economy expanding or contracting?

The rough outlines of the bullish and bearish cases are well known to anyone who follows the economic/financial media.

The Bulls vs. The Bears

On the bullish side, Europe’s credit crisis is seen as abating, the US economy is viewed as continuing its slow but steady expansion as unemployment declines, and China is seen as transitioning from an export-dependent mercantilist economy to one based more on domestic consumption.

The bearish position sees the European debt crisis as a long-term force for economic contraction as austerity and debt service are diverting national incomes away from productive investments and consumption, China’s real estate bubble is bursting, with no equivalent source of spending available, and the US is sliding into recession, a call supported by the Economic Cycle Research Institute’s Leading Economic Indicator and the Chicago Fed National Activity Index (CFNAI), depicted on this chart courtesy of The Technical Take.

Since much of the bullish case for rising commodity prices rests on China and India, common sense suggests that we take a look at those stock markets, as equities tend to be indicators for the underlying growth prospects of the economy. Here is India’s Sensex Index:

And here is China’s SSEC index: 

In both cases, key support levels have been broken and downtrends that began months before the US market broke down in August 2011 are still firmly in place. Without any fancy footwork, it’s difficult to view the action of these critical markets for commodities as being remotely bullish or supportive of stronger demand for commodities going forward.

The Technical Picture

To get the technical pulse of the general market for commodities, let’s look at the Reuters/Jefferies CRB Index, courtesy of

In this chart, we see the tremendous spike in commodity prices that accompanied the top of the pre-financial meltdown global economy in 2008, its free-fall heading into 2009, and the gradual recovery since February 2009. The trend line that has been in place since that low has been broken, albeit briefly.

For additional information, let’s turn to another view of the CRB:

The bull sees a double bottom; the bear sees a potentially serious break in a rising trend line. The bullish case remains unsupported by key indicators such as RSI, CCI, and MACD, all of which remain weak.

To many, the bullish case for global commodities relies on a positive reading of US gross domestic product (GDP), currently clocked at an annual rate +1.8% by the Bureau of Labor Statistics (BLS), and on a rising US stock market, which is seen by bulls as a leading indicator of future growth prospects.

In this view, the US has “decoupled” from weaker developed/developing economies, and is now the engine for future global growth and thus demand for commodities.

If the US stock market is taken as the leading indicator for this decoupling/continued-growth/higher-commodity-prices story, then we should ask what actually drives the valuation of the S&P 500. Courtesy of, here is a chart of margin debt and the SPX (S&P 500). Rather than being the leading indicator for future commodity demand, this chart suggests the market is far more correlated to margin debt than it is to commodity demand. In other words, when margin debt expands and the proceeds are dumped into stocks, the market rises. When margin debt declines, the market declines.

It is noteworthy that margin debt has led the SPX since the March 2009 low. If debt is the key driver of U.S. stocks rather than global growth, then this calls into question the bullish assumption that the S&P 500 is a leading indicator for future commodity demand.

In Part II: Hard Times Ahead for Assets, we dive deeper into examining the leading indicators for commodities and what they predict regarding where prices are likely headed. In our exploration, we're able to make similar forecasts about how the equity market in general will fare in 2012.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

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brew's picture

jim rogers didn't write this...

greyghost's picture

but but but but but but......peak oil.....peak oil

on a more serious note! has anyone else's gasoline prices fallen, all the while oil has gone up!!!!!!!! does anyone know why the disconnect?????

Hohum's picture

because Brent crude is down (WTI is up).  Not a great shock.  Don't get used to the lower gas prices, though.

greyghost's picture

well living in calif. don't we get our crude from wti and europe brent???? and no i am not getting used to them, just taking what i can get.

firstdivision's picture

Prices are unstable.  They will break to the upside, but that is because they are trying to cut supply faster than demand falls.  In the mid-term I would expect sub $3 prices, but do see a spike up in the short-run.

greyghost's picture

thank you firstdivision nice web sites for future reference....thanks

Raymond Reason's picture

The Brent vs WTI doesn't really explain it, because there has also been a disconnect between gas and diesel.  Diesel has only fallen a few cents. 

mophead's picture

It's to keep delivery fees high so wholesalers/distributors/shippers are discouraged from reducing 'fuel surcharges' (or discourages them from reducing prices when baked into the cake). Why is this important? Obviously because retailers pass the additional costs onto the consumers in the form of price increases (not a line item that says 'fuel surcharge') and the Gov. wants phony GDP (permanently; prices are sticky, as they say). If regular gas prices go up too much what you get is sticker shock and people  stop spending altogether.

SheepDog-One's picture

Probably govt mandated so people would do more 'consumin'...really stupid.

firstdivision's picture

explain that to whomever just bought an ass load of USO a few minutes ago.

SheepDog-One's picture

What has 'topped out' is not commodities, but 'economic expansion' which has only been due to wildly increased supply of fiat money. 

Economic insanity and centrally planned world banking is about topped out as well, no more blood to suck.

Quinvarius's picture

They are going to print blood and suck on that for a while.

DormRoom's picture

consider the scenario in which China's property bubble pops.

That would likely collapse copper prices.

Also, assuming  a lot of players are massively  leveraged up on a collateral trade, they will be forced to delever their positions in other asset classes.  Thus more asset selling.

If the copper collateral trade ends, so likely will be the finacialization of copper, and thus bids on futures contracts will dry up, and copper backwardation wiil create a negative feedback loop.


Same process may happen with gold.  modern finance is structured like an inverse pyramid.  You have leverage positions on asset classes based on different asset collateral.  But there's too much cross-pollination/dependencies, so when the base of one asset class unwinds, it may rapidly collapse other asset classes.

agent default's picture

Consider that China crashes.  Obviously, China will run for liquidity. What is the first asset they will sell to raise cash?  Why US Treasuries.  What will happen to interest rates then?  Either they go up,in which case the US defaults within weeks, of the Bernank keeps them artificially low as he is doing right now.  Either way we have an aggressive monetization scenario, in which the FED prints moar, because moar.  Because that's the only way they can kick the can.  So, in the long run you are better off in hard assets than in cash and bonds.  As far as the "commodity assets" are concerned, if you own the real commodity, you are reasonably safe.  If on the other hand you own NYMEX/CBOT/COMEX futures and ETFs, you are right.  There is a serious risk that the paper side of these assets will collapse.  This however may lead to the following situation:  Producers refusing to sell or stopping production at those price levels.  And then exactly what does that do to the futures markets?  And what happens when people holding the futures, which are multiples of the real underlying in any market you care to look, start to demand delivery?  Real prices skyrocket, futures become worthless coast to coast  lawsuits for fraud against market makers,  another total clusterfuck brought to you by the TBTFs.  Unfortunately, PMs, although not the best, are the only commodity that you can physically hold.  Yes wheat and rice are far more useful than gold, but how do you plan to accumulate so much stuff?

scatterbrains's picture

not sure but I hope you bitches are gonna let me take another swig around sub $25 in silver... at least for a few minutes guys.. don't make me chase it.

FreeNewEnergy's picture

I think you're going to get your wish, probably before March, if current trends remain in place.

Why do you think the govt. extended the Payroll tax cuts (actually a 33% reduction in employee contributions to SS, but the media won't characterize it that way) for only two months?

Sure, they cannot agree on much, but they know there's going to be hell to pay in January, especially when those retail figures start coming out, like, "sales were strong, but profit was down 20%."

January will be a good month to short anything. I'm waiting on silver as well.

agent default's picture

Silver may hit 25-20 until May if the current liquidity squeeze continues.  But when it goes up above 50, I doubt you will see prices beginning with 3 for years.

SheepDog-One's picture

Empty blood calories, they can try to live on that all they like but while youre eating as much as you can youre still starving to death.

midtowng's picture

I'd say that all short and medium term trends are bearish for commodities - and that partly means gold and silver as well.

In the long-run commodities are still the place to be, but you'll have to be very patient. The easy money in commodities has already been made.

francis_sawyer's picture

I still can't believe people make these comments...

The easy money in commodities has already been made...

OK... I see... So the OBJECT of the game is to stack $100 dollar denominated pieces of cotton as high as possible... Right? THAT makes you rich...

Well then, let's just apply that logic a little further... GRANDMA is on a pension... & since the "price" of everything is now coming down (as result of the PRINTING of exponentially larger quantities of worthless pieces of denominated cotton)... Soon, GRANDMA will be able to buy MUCH MORE of whatever her heart desires...

Hold on Grandma! Just eat catfood for a little while longer!... Soon you'll be able to buy prime rib & caviar for the cost of a tin of catfood... Don't fill up the Buick either! You'll soon be able to double your church visits on the same tank! Listen to those PAPER CHARTISTS! They're EXPERTS! They know what they're talking about...

Hey... & if you have any extra to spare... ROBOT TRADER probably has a few hot equities he can turn you on to so that yhou can DOUBLE your stack of denominated pieces of cotton... (whether you end up being able to convert them into either CATFOOD or CAVIAR, we'll let the 'Gods' decide)...

Scirocco's picture

Topped out in what terms ? In USD ? haha... no can do.


vast-dom's picture

I think I've topped the fuck out?

bill1102inf's picture

This is an example of what happens when something gets too expensive. People don't/wont buy it and the price comes down. Doesn't matter if its Gasoline, home heating oil, wheat, rice, beef, pork, or houses.  Counting on China to spend all its USD's to buy this stuff is not a smart idea, their state/local govs dont even have the $$ to make bond payments. Its ALL comming down.

SheepDog-One's picture

Also with the amount of trillions of dollars flooding markets, oil should be way over $100. That is a price-suppressed level certainly.

Theyre trying to print faster to fill a hole which only gets deeper the more they try to throw in. Its all insane, only a matter of time before the entire contraption blows to pieces.

Theyve built a system where only a few people are multi bazillionaires, something like 100 families control 90% of all the worlds wealth and resources while the rest live off scraps, and theyre surprised now that their crazy system is failing them? I dont see why, unless they all are really just inbred lunatics.

pine_marten's picture

Yep, inbred lunatics.  They became so greedy and dimmented that they lost sight of what makes civilization function.  They have killed their own golden goose by neglect.

High Plains Drifter's picture

charts , charts ,charts............full steam ahead............bah humbug.........


when the commodities bull started this time in 2001, what were our collective debts?   and what are they now?   what was m3 then?  what is m3 now?   how many derivitives were in existence in 2001 and how many are in existence now?   etc etc.............


i have faith in gentle ben........he will keep doing what he is told like the good little minion that he is..........

Prairie Fire's picture

Of course they've topped out. It's a no brainer. I agree with Sheep that it's due to exces fiat and not expansion.

All of you gold bugs should get on your knees and beg the Fed to print. Same for anyone still long in these markets--equity and commodity. Personally I want them to inflate the bubble of all bubbles--it buys time, time for last minute preperations and stock piling.

For now gold will keep sinking because people need to unlock liquidity. The USD will keep rising because people need safety--where alse are you going to park your capital?

The best way to kill 2 birds with one stone is to use a printer.


High Plains Drifter's picture

jesse over at the americain cafe said a few years ago that he thought one day a big long would come in and crush the bank short game. he said it would come out of the shadows and they would not see it coming.  there is no honor among thieves. when it gets to nutt cutting time, its every man for himself. if gold was such a bad thing then why do banks and countries such as china and russia and india and etc etc buy it......chart readers are just technicians. if you asked this guy about the city of london, he  would not understand the question. 

JimmyTheHand's picture

For liquidity someone would have to sell it, but someone would also have to buy it.  Gold is in short supply, it isn't like a factory has created a billion ounces and now has to much on hand so the prices are reduced so that it can sell its inventory.  Their is more gold being mined, yes, but not enough to drive price down dramatically.  The gold that is changing hands is doing just that, changing hands from weak hands to strong hands.  The price will rise as their is enough money already in the system to drive it up.  But the price of gold is ALWAYS driven down when the commercials are buying big stakes into it.  More bang for their buck.  Once they have finished buying from weak hands the price will go up.  Go look at the COT report recently.  You will see that the BIGS are buying and that means the metals will soon rise again as they let it run.  The CFTC just stands by and lets it happen....

Jim Willie has been saying that the price might actually be being supressed by one of the shadow longs that is getting ready to hand the bankers their a$$ by ramping up the price after the shadow longs have bought what they wanted. 

I guess time will tell who is right.

JimmyTheHand's picture

Topped out?!  Hehehe... more like coiling up like a snake and getting ready to strike even higher prices. 

Chris is only looking at commodities through the eyes of the Comex.  PEOPLE ARE FLEEING THE COMEX, so of course prices are going down.  People are going straight to farmers and miners, totally bypassing the CRIMEX because they don't want to be MF'ed Globaled.

The OI on January gold has risen quite a bit and the commercials are bailing out of theirs shorts and adding longs.  Paper price is going down, physical price is going up and you can expect real physical shortages of certain commodities in the near future.

Corn anyone?  Well good luck with that, the crops sucked last year because of the drought and higher fuel costs.  Guess what we have again this year?  More drought and even higher fuel costs.


sbenard's picture

Commodities topping out?


Crude oil is up 7 days in a row! Up $1 today, just blasted through $100, close to $101!

Corn is up 7 days in a row! Wheat - same thing!

Soybeans -- up 30 cents today, up 9 days in a row, up 14 of the last 17 days!

Beef and pork futures are up!

Milk futures are up!

Cocoa, coffee, sugar, and cotton are all up! OJ too!

Thanks to the ECB and LTRO!

JimmyTheHand's picture

Yea, I forgot about Beef.  BEEF is going to get REAL expensive.  I know a lot of ranchers and farmers both.  The majority have sold their cattle because of drought and higher feed costs and the majority of farmers are having hell because their just isn't enough water falling.  All of that translates into much higher costs when it happens several years in a row. 

I expect farmers markets to start springing up as they attempt to sell what little they do have and as they bypass the normal markets because they are tired of getting ripped off. 

What we are seeing is a contraction, away from globalization and to more localized markets.

Hohum's picture

Good thing the beef market isn't a pure free market.  If it were, prices would be multiples higher.'s picture

But you can't eat beef. At least I won't eat beef. Buffalo's the thing.

Raymond Reason's picture

Martinson's anylisis makes sense for cement, steel, copper.  But not for food, nor PMs.  People gotta eat, gotta protect savings. 

Scirocco's picture

It is freaking awesome to have Oil decorrelate a bit from the rest...


fuu's picture

"Since much of the bullish case for rising commodity prices rests on China and India, common sense suggests that we take a look at those stock markets, as equities tend to be indicators for the underlying growth prospects of the economy."


akak's picture

I took notice of that particular piece of RobotLemming-like gibberish myself.

Mugatu's picture

Buy Gold, but wait until it washes out to below $1300.  

It is just time to bump the weak holders off the gold train.  We might even see silver below $23 before this purge is completed. PM's need a good purging to set up the next big run.  We need some pain before we see the gain.

JW n FL's picture



I dont know if things go quite that low.. but lower.. sure.

when the markets drop 40%.. so will the price of paper metals.

I dont think people will be able to buy physical at those lower prices..

but I will have cash just in case!

I think anyone who is not buying silver at sub $30's is CRAZY!

I think anyone not buying Gold sub $1,600 is Crazy!

Like I said.. I Agree with prices going lower.. I just think that backwardation takes over even more so that right now.

whereas the U.S. de-coupling from Europe is NOT! going to happen..

I can PROMISE! YOU!! ALL!!! Silver and Gold.. Physical! will be de-coupling from the paper market that trades 100 times more a day than what is above ground.. that day is coming. Lease rates be damned!

people will look back and ask?? how did not EVERYONE see that coming?

100 times (or more) a day traded! than what the entire amount above ground!

yes a run is coming..

and silver is more useful and more scarce than gold.


I have tried to help you!

listen or dont!

the facts have been provided! and are easily sourced thru Google!

and I didn’t even mention how the markets are rigged..

did anyone else notice how gold and silver steadily went up when the debt ceiling was reached and the FED could no longer buy the price down??


Vint Slugs's picture

Gave you a red arrow for your asinine remark about the Fed buying the market down.  Try using 'selling' or 'offering'.

Go ahead and buy silver "sub $30s.  You've got plenty of time - that market's not going to go anywhere significant up side for the next 2 years.

JW n FL's picture



I gave you a green arrow for speaking up. After using the down arrow!


but as for the market will be in grid lock for the next two (2) years I have to disagree.

1. The Stock Market is going to have an adjustment.. in which the paper price (due to covering) will go lower.. in line with the broader market.

1.a depending on how long and how much printing Europe does.. the ups and downs in the flights to safety to flights of covering loses could be significant.

2. Printing will at some point have to kick in.. love it or lump it.. I am no fan of it myself.. but it doesn’t change the fact that on Dec. 30th America is at the upper threshold of its spending limits.

2.a As I see external pressure(s) from Europe, China and others.. along with a much stronger downward spending habits of regular Americans.. and not to mention the complete and utter lack of trust in the markets.. should drive the markets down far enough (easily) for Open Market Operations to get involved with the day to day of the markets.


 Happy New Year! I hope You make a Killing either way!

YouThePeople's picture

I'm no financial Superman, Look at these charts,,,fucking ridiculous.


JW n FL's picture



Industry Balks at NYSE Sub-Penny Plan

By Peter Chapman

An NYSE Euronext proposal to permit its members to quote in sub-pennies is proving highly controversial.

The exchange operator's "Retail Liquidity Program" would create dark pools at the New York Stock Exchange and NYSE Amex, where members could vie for retail order flow with quotes only a tenth of a cent better than the market's best displayed prices.

Read the full story


we cant have the Goy Slaves taking pennies from off the top! LULZ!!

Dr. Engali's picture

They may have topped on the short term, but Ben will be printing soon to monetize the 1.2 trillion new debt ceiling.

High Plains Drifter's picture

where is robo fuckshite?   i expect him to come in here and do some kicking ...........

Dr. Engali's picture

He has been around he commented a few posts back.

Sudden Debt's picture

At least gold and silver demand still goes up, so not every commodity is going to,go down.