Gavekal Capital: Headline Commodity Indices Are Stable But Breadth Has Been Improving

Tuesday, July 15, 2014

Headline Commodity Indices Are Stable But Breadth Has Been Improving

The Reuters CRB Continuous Commodity Index is up about 3.5% over the past year and is only about 11% higher than it was four years ago. So on the surface commodity prices seem relatively stable. This year, however, we have seen a significant expansion in breadth according to our commodities diffusion index.

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Our 12-month commodity diffusion index tracks 20 different commodities and measures whether or not prices are higher or lower than they were a year ago. At the beginning of the year, 15 commodities were lower and only 5 were higher than the previous year so the net diffusion index stood at -10 (we score our diffusion index by using a +1, -1 system where, in this case, if the commodity is higher than it was it scores a +1 and if the commodity is lower than it was it scores a -1. We add them all together to get the diffusion index level). At the end of June, this had to a net score of +6 (13 were higher and 7 were lower). This is a positive development for emerging market currencies as they have had a pretty tight relationship to changes in commodity prices.

We also have an emerging market diffusion index that tracks 9 currencies against the dollar using the same methodology as we explained above (in this case if the currency is stronger against the dollar it scores a 1 and if it is weaker against the dollar it scores a -1). The emerging market currency diffusion index has moved from a -7 net score in April to a -3 net score in June as breadth in commodity prices has improved.

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