Commodities – Room of Opportunity?

Thus far, gold is the only major commodities that are trading at all-time high in US dollar terms. And that sets and shapes a lot expectations and opinions about the general situation of commodity market.

However, if we week at gold’s price performance against, and correlation with other types of commodities and asset classes, it may reveal some interesting observations.

Since late August, gold has strong positive correlation to silver, palladium, platinium, hogs, coffee, zinc, natural gas, corn, lead and even Baltic index and low or negative correlation with sugar, cattle, soybeans, wheat, nickel, copper, light crude, heating oil and aluminium.

In essence, soft commodities have weak relationships with gold and precious metals tend to have closely allied to gold, especially silver with a correlation of over 95%. The precious metal sector has continued to make new highs in US dollar terms, but these latest moves are at risk of some correction. Speculative activity has been far more influential than industrial buying interest and the speculative component on the futures exchanges increased sharply in all four metals in recent weeks.

Speculative interest has increased again with the net speculative long position on NMYEX rising and these patterns of trading also tend to suggest that precious commodities may have overshot itself in the near term and it has already been experiencing some profit-taking in the Far East.

The correlation gaps between gold and soft commodities, however may present a good investment opportunity. This entry point will only be logical after price adjustment on precious metals come to an end. Time for a pull-back on precious commodities can take place for quite a while for full rewind as economic numbers are still mixed and industrial demand still remains sparse.