The Case for Raw Commodity Sector Bottoming in 2016

(Kitco News) - Let’s take a look at a few longer-term charts of key markets and indexes, which are presently providing some technical clues the major “bust” cycle in the raw commodity sector will likely run its course in 2016.

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Goldman Sachs Commodity Index: The GSCI monthly chart shows the index price this month dropped below the 2009 low and hit a 12-year low. The raw commodity sector is presently experiencing its second-largest bust cycle dating back at least 40 years—second only to the big downdraft seen in 2008 and 2009.

The impact of this major bust in raw commodity markets is widespread and has just recently come to include a big sell-off in world stock markets. There are increasing worries about problematic price deflation gripping world economies, which in a worst-case scenario could push those economies into depression. I’m not in the doomsday camp. My bias is that during 2016 (and likely in the first half of the year) the raw commodity sector, as seen by the GSCI, will bottom out and at least start to trade sideways.

One element of my reasoning is the present extreme bearish raw commodity attitudes that seem to be pervasive in the marketplace, and most pronounced in crude oil and gold. When attitudes get so extremely bearish, it’s a good clue that the downturn is close to ending.

See on the monthly chart for the GSCI that prices are presently in a steep downdraft that has pushed the Relative Strength Index (RSI) well into oversold territory (below 30.0). The present posture of the RSI hints that the indicator could be setting up to produce a bullish double-bottom reversal pattern. Yes, classic chart patterns can even be applied to technical studies, themselves.

The posture of the RSI on the monthly GSCI chart is another clue that the raw commodity sector is close to bottoming. What this means is that present prices in many raw commodities are likely long-term value-buying opportunities. Here are the main commodities that come to mind for me, when thinking about value buys at present: precious metals, grains, coffee, sugar, natural gas, crude oil, cotton and lumber.

Nymex Crude Oil: The raw commodity that will have to lead others out of the sector slump will have to be crude oil. As long as crude oil prices remain in a downtrend, so will many other raw commodity markets. Crude oil is an important “outside market” that impacts so many other markets, including precious metals, stock indexes, and currency and financial markets. You have to watch crude oil extra closely in the coming weeks and few months, because its price machinations will very likely be impacting the markets you are watching.

See on the monthly crude oil chart that prices are in a steep downtrend and have just hit a 13-year low. See at the bottom of the chart that the Relative Strength Index is well into oversold territory (below 30.0) and is presently reading 24.73. The recent RSI readings during the present downdraft in crude oil are the lowest in 30 years—dating back to 1986 when Nymex crude oil prices fell below $10.00 a barrel. That’s a solid technical clue the downside in crude oil is limited with prices presently below $30.00 a barrel.

U.S. Dollar Index: See on the monthly continuation chart for the USDX that prices have been trending higher since 2014, but the past few months have seen the uptrend pause. If the USDX can push above resistance at the 2015 high, as seen on the chart, then another leg up in prices should be expected. A continued uptrend in the U.S. dollar index is 2016 would be an underlying bearish element for the raw commodity sector. However, my bias is that any continued strength in the USDX would not have a major impact on longer-term trends in raw commodity prices.

Gold: The yellow metal is in a steep longer-term downtrend and the bears presently have the firm technical advantage. See on the monthly continuation chart for nearby Comex gold futures that prices have dropped below the 50% Fibonacci retracement level (strong price support) of the price move from the 2001 low to all-time high scored in 2011. That’s another bearish clue for gold.

Major psychological support at the $1,000-an-ounce mark lies just below the market, at present. It would not surprise me to see gold prices challenge the $1,000 level and even drop a bit below it, in the coming months. However, I do not see strong downside price potential for gold if prices do drop below $1,000. Gold is one of the raw commodity markets that I believe to be a longer-term value buy at present price levels. I do not believe it’s a wild prediction to say that within the next several years gold prices will set a new record high.

See on the other monthly gold chart that the Relative Strength Index is in a sideways and choppy posture similar to and not seen since that of the late 1990s. It was just after that time period when gold prices embarked on a long climb to new highs in 2011.

By Jim Wyckoff, contributing to Kitco News; jwyckoff@kitco.com

Follow me on Twitter @jimwyckoff