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Chart In Focus

Gold Foretold The Commodities Dip

Chart In Focus
May 06, 2011

May's big drop in commodities unfolded with a lot of help from the CME Group, which upped the margin requirements on silver repeatedly.  And it led hedge funds and other portfolios to start selling other commodities to meet margin calls.

It might seem like this selloff was solely caused by the intervention of the exchange officials adjusting the rules, but it arrives right on schedule according to the leading indication given by gold prices.  The way it works is that gold prices travel down the road first, and then commodities follow in the same footsteps about 4 months later.

The price plot of gold in this week's chart is shifted forward by 80 trading days to reveal how its patterns get repeated in the CRB Index.  This effect also works if you use the old CRB Index, now called the Continuous Commodity Index (CCI).  The dip underway in the CRB Index matches one that occurred in gold back in January, and even the triple top pattern in gold got repeated by the CRB Index. 

It is worth noting that the 80 trading day offset pattern used in this chart is somewhat approximate.  At other times, a lag time of 75 days seems to work better.  This does not change the inherent truth of the relationship.  But it does suggest that we should not chisel that May 24 date into stone.  The predictive relationship is not always that precise. 

The significance of this story is not just that there is a commodities price decline occurring on schedule in May.  Gold moved higher out of that bottom last January, and has zoomed to higher highs.  That same script should be in store for commodities prices as we head into summer.  But before then, a lot more people have to get convinced that commodities prices cannot ever again go higher, and that we are headed for deflation.  Once that is accomplished (around May 24), the CRB Index should follow gold's path toward higher highs this summer.  

Tom McClellan
Editor, The McClellan Market Report

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