What will happen when a recovery in commodities begins?
There’s most definitely been a slump in commodities. There are some key indicators that show us when a recovery is going to happen…
#1: Big buyers start to buy
A good thing to keep an eye on is the JPMorgan Global Purchasing Managers’ Index (PMI). It has a tendency to show what commodities are going to do, Peter Krauth in Money Morning US explains.
By looking at the one month moving average with the three month moving average, if the monthly reading moves above the three month moving average, it can indicate a spike in some commodities.
Another positive sign is when PMI readings for the US, Europe, China and the world all read over 50. Only China isn’t over 50 at the moment.
#2: Investor sentiment
Investor sentiment is also worth looking at. As a contrarian indicator, you want to see investors doing the right thing at the wrong time.
Sentimentrader.com has an investor sentiment indicator for the CRB Commodity Index. From looking at this indicator, it shows that it could still be some months before the bottom is in, but that a recovery is brewing.
#3: Respected investors
When big fund managers start buying into commodities, this can also be a good sign as it suggests they think shares are at bargain prices.
This has been happening lately. The most well-known investor is Warren Buffett who bought a 10% stake in New York Stock Exchange listed Phillips 66, an oil refiner.
As it stands, there is still some time before the bottom is in commodities, but with the indicators starting to turn, it shouldn’t be long until it is time to start investing in producers.
So there you have it. Why the commodity bull will return.
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