Is the commodity bull market already losing steam?

Commodities have put in a blistering performance over the past year. But – oil aside – the commodity bull market looks like it might have peaked. Dominic Frisby explains what’s going on.

Mining dump truck
Base metal prices are drifting lower
(Image credit: © Getty Images)

The headlines are full of inflation. Just this morning, we’ve had yet another “surprise” inflation reading, with UK prices rising faster than analysts had expected. Again.

The asset class most readily associated with inflation in most investors’ minds – commodities – has put in a blistering performance over the past year.

And yet, the question I’m asking myself at the moment is: has this bull market in commodities topped?

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It certainly feels like it might have.

Oil says the commodity bull market is still on...

The last few weeks have seen some pretty violent sell-offs. Timber, for example, one of the poster boys of the inflation narrative, has fallen by half.

So, I ask myself, are these corrections marking the end of what was a pretty mighty bull market? Do we sell because the bear is here? Or are they simply the slap in the face that bull markets tend to give you to shake you out of your positions? Let’s do a quick review and find out.

Oil is the commodity that is saying “bull market” most strongly. It’s the most important commodity of the lot, and it keeps grinding higher. Higher oil prices mean inflation, in the modern sense of the word (higher prices, not money printing), and inflation in everyday goods and services, not just asset prices.

Both Brent crude oil and West Texas Intermediate crude oil are now trading above $70 a barrel ($74 and $72 respectively). Yesterday saw new highs. The last time WTIC was above $70 was in 2018, so we are at three-year highs. Brent, meanwhile, is re-testing its 2019 high at $75.

As far as oil is concerned, the bull market is still on. Where oil goes, other commodities tend to follow.

Natural gas, however, has run out of steam – excuse the dodgy metaphor – at its 2020 highs, and looks like it’s put in a double top. That’s a point for the bears, but not a particularly significant point. Oil is far more important.

… but the metals aren’t looking so hot

So we turn to metals, and we wince a little. The precious metals have quite definitely turned down. Gold has been making lower lows for three weeks now. Its recent rally petered out at the all-important $1,920 an ounce (important because that was the high in 2011 that stood for nine years) and now it is trending lower.

Silver’s looking better and holding up well in the $27-$28 range. It’s forming some kind of wedge-y, triangular pattern. I maintain my view that if it can get above $30, it probably goes to $50. But for now it can’t get above $30. But just to be holding up while other metals are sagging is a sign of relative strength.

Platinum has been drifting lower since April – one day its time will come again. Hopefully, in my lifetime. Palladium has been edging down since the beginning of May.

As for base metals, copper, nickel, aluminium and iron ore are drifting lower. They have been for a month or so (nickel since February). Lead and zinc are both holding up better, only down a few percent from their early May highs. And tin – well, there’s no stopping tin.

Like lead and zinc it might be down a little from its early May’s highs, but it’s holding up comfortably above $30,000/tonne and it’s going to go a lot higher. There bain’t enough, as the old Cornish tin miners would say.

In short, silver, lead and zinc (which are usually mined together) and tin are all saying “consolidation in an ongoing bull market”.

Gold, copper and all the other metals are not so convincing.

Agricultural and soft commodities are a mixed bag

We turn our attention to the grains and the soft commodities next. Here, too, the message is a concerning one for those who are long commodities. Wheat, corn, oats, rice, soybeans, soybean oil, soybean meal, cotton, palm oil, cocoa – they’re pretty much all of them in downtrends now, having peaked a few weeks ago.

Some are worse than others. Cocoa has been in a downtrend since early 2020. Sugar, coffee and lean hogs all look better. They’ve had a down week these last seven days, but on the back of many weeks of going up.

So the message is mixed again, but it’s hardly ringing positivity. Some commodities are in definite downtrends, others are holding up well. But “holding up well” – that’s bear market talk. This is not the stampeding bull market of a couple of months ago.

The one price that rules them all – the US dollar

On the other side of the coin of all of these trades, we have the US dollar, which is trading at key levels against a multitude of currencies. This really is the big story in foreign exchange – and forex markets are much bigger than commodities.

“Cable” (pound vs dollar) at $1.40 or so is up against a barrier. That price area, now resistance, was support for nearly 40 years.

Against the Canadian dollar (the commodity currency, in many ways), the US dollar has found support at its 2017 lows and now looks like it has put in a multi-year double bottom.

And the US dollar index itself (the dollar versus a basket of its major trading partners) has also run into multi-year support in the 89-90 area where declines have halted. A rally looks on the cards. It’s all about that 89-90 level, and that I feel will determine the fate of many commodities.

Commodities don’t receive the same protection as the S&P 500, which is America’s savings vehicle, or the UK housing market (which is unofficially the UK’s). Authorities don’t mind if commodity prices fall. If the S&P 500 is booming it means the economy is doing well; if commodities are booming, it means inflation.

The bond market, where yields peaked back in March, also seems to have rejected inflation fears.

My hunch is that the US dollar rallies from here and that a few more months of weakness lie ahead for commodities.

That doesn’t detract from the bigger story – that many metals in particular have suffered years of under-investment, so there is a genuine shortage. But the speculative money that piled into commodities is now dribbling out.

Am I interpreting this right?

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.

Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is, we think, the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. 

His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government. 

Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art. You can follow him on X @dominicfrisby