A Broad Commodity Rally Is Here

Christian DeHaemer

Posted April 10, 2024

Today the CPI which is the Fed’s gauge of inflation came in higher than expected and the market sold off.

The biggest inflation movers were rent and gasoline.  Rent of primary residence jumped 0.4% in March.  This number has gone up at least 0.4% for 31 consecutive months.  Despite what you hear on the news, rents are going up.

The media likes to point out that new leases and some markets show rents declining.  But for most people (91% of renters stay in the same place each year) rents are increasing.

Energy Prices are Up

The energy index rose 1.1 percent over the month. Gasoline rose 1.7 percent.  Together with rent, this equals half the CPI increases.

As far as year-over-year numbers the CPI is up 3.5%.  Rent is up 5.7% and food and beverage is up 2.2%.  Energy is up 2.1 percent from a year ago. Gasoline is up 1.3 percent from a year ago.

What this means is that inflation is a whole lot stickier than the market was anticipating.   It could be that the 65% of people who own their own homes and refinanced around 3% have more disposable income.  Most of these people also had a decent raise last year.

They are spending money and driving the economy despite the high interest rates.

Of course, the real reason for inflation is the government keeps spending without increasing taxes to pay for it.  The national debt in 2013 was $16 trillion.  Ten years later it has crossed $33 trillion.  

Debt to GDP is 120%, up from 98% in 2013 and 55% in the year 2000.

Broad Commodity Rally

I’ve been in this business for about 30 years and when I see a broad-based commodity rally I pay attention.  That’s what we have now.

Gold, silver, copper, oil, natural gas, corn, wheat, cacao, coffee, cattle…  All of it is up.  This can only mean one thing: the value of the dollar is declining.

The last time we saw this type of commodity rally was in 2008 when it was called the commodity super cycle.

The 2000s commodity bubble was fueled by low prices, Chinese demand, and the idea that things you could drop on your foot were a safe haven for money.  It really started taking off after the housing bust in Western countries from the U.S. to Greece, Ireland, and Spain among others.

Furthermore, the S&P 500 dropped about 60%.  There was real panic and people needed a place to put their money.

Pundits claimed that was a safe bet because prices were based on supply and demand and were used whereas stocks were bought for speculation and driven by news.  And so a real estate and a stock bubble were exchanged for a commodity bubble.  

You may remember oil peaking out at $144 a barrel.  The price of uranium companies went bananas.  Uranium Energy Corp. (UEC) went from $0.35 to $7.48.  Rare earth metals took off. Molybdenum was in high demand.

In the end, Warren Buffet started buying stocks.  The housing market settled down and China changed the way it borrowed money based on physical assets that ended hoarding.

Could a super cycle happen again?  Of course, it’s been 15 years or so, which means there is a new generation of people who have never bet it all and lost money in commodities.  And they are cheap.  ExxonMobile (XOM) , the best of the breed, has a price-to-earnings ratio of 14 and pays a 4% dividend.  Coal companies are even cheaper.  Alliance Resource Partners, L.P. (ARLP) has a price-to-earnings ratio of 4.59 and pays a 14% dividend.  That’s absurd.

All the best,

Christian DeHaemer
Pro Trader Today