Global Commodities Continue to Flirt with 85-Yr Support

I pointed this out at the beginning of March but wanted to do the same as we head toward the end of the month because I find it so important:

Global commodity prices, via the Thomson Reuters Core Commodity Index – continue to flirt with an 85-yr support line dating back to 1933.

The line’s origin dates back to 1933 when FDR ended the gold standard via E.O. 6102, thereby devaluing the USD in an attempt to raise nominal prices and end the Great Depression.  Indeed, one can see that prior to this, the index’s break below ~15-yr support in late 1929, and the collapse in commodity prices that followed over the next three years, coincided with the Great Depression.  Thereafter, the line’s next touch point runs through the early 1940s when commodities began a major, WW2-induced rally.  Thereafter it passes through 1971 when Nixon ended gold convertibility amid soaring Vietnam-era deficits.  The most recent flirtation I referenced has been over the past three years, 2016-2019, amid generalized global commodity weakness, initially and conspicuously driven by the mid-2014-early-2016 crash in crude oil amid the Obama admin’s concerted effort to wage financial warfare against Russia.

The logical conclusions from the chart above strike me as follows:

  • Current, 85-yr support for commodity prices is where history’s two major USD devals have occurred; coupled with price action that suggests the USD is structurally extended, this would seem to increase the probability of USD weakness moving forward
  • Using history as a guide, specifically the events of 1933 and 1971, if support is to hold and commodity prices to reverse, it could coincide with or require a major deval of the USD
  • Using history as a guide, specifically late 1929’s breakdown in commodity prices, if 85-yr support fails to hold, a wave of global deflation could commence

If one’s view is sufficiently long-term, it becomes easier to understand Powell’s historic and perhaps, many would argue, ignominious reversal to calling inflation “one of the major challenges of our time,’’ from “auto-pilot” balance sheet quantitative tightening just a few months ago.