BANG!
The bull market in commodities is off and running. If you’re not making money yet, shake off the slumber.
In most cases, commodities prices bottomed over the winter.
Then…
Among the precious metals, gold rallied 23% off its low… Silver rallied 27% off its low… And platinum rallied 33%.
[ad#Google Adsense 336×280-IA]In energy, natural gas rallied 60% and crude oil rallied 96%.
Among agricultural commodities, soybeans rallied 36%… Coffee rallied 26%… And corn rallied 25%.
Sugar prices are up 90% from their August low.
By most common definitions, all of the commodities above are now in bull markets.
But lots of folks still haven’t started to buy.
Maybe they’re skeptical it will continue after the brutal bear market of the past five years. Or maybe they’re waiting for a pullback.
That’s fine. But being overly cautious could prove to be a major mistake…
Today, we’ll put the recent commodities rallies into perspective. I’ll show you that as a group, commodities are still a fantastic bargain. They have a long way to run. And if you buy the right assets now, your gains in the coming years will likely be incredible.
Let’s start by looking at the Bloomberg Commodity Index. The index tracks the prices of all of the commodities above (except platinum) and a handful of others (including aluminum, live cattle, cotton, and zinc).
As you can see in the chart below, the index booms and busts. Right now, it is coming off one of its biggest busts yet… and it is up just 21% from its recent low.
The four booms over the past quarter century averaged 87%. If the Bloomberg Commodity Index stages another “average” boom, it would mean another 56% upside from here.
Now, let’s consider value…
Because commodities don’t generate earnings or pay dividends, valuing them is a lot different from valuing businesses. But one simple and useful way to value commodities is by comparing them with other assets, like stocks.
The chart below shows the ratio of the benchmark S&P 500 Index to the Bloomberg Commodity Index. The higher the ratio, the more expensive stocks are relative to commodities… and the cheaper commodities are relative to stocks.
The ratio peaked around 27 earlier this year. That was its highest reading ever. And as you can see, the recent rally took the ratio down to 23.4.
The average for the stock-to-commodities ratio over the past 24 years is about 10. That’s a huge drop from here.
The ratio can move lower in different ways. Commodities could rise faster than stocks. Commodities could fall more slowly than stocks. Or commodities could rise while stocks fall (the opposite of what has happened over the past five years).
If stocks hold steady, it would take a 134% rally in commodities for the ratio to reach its long-term average. Even for the ratio to reach 16 – near its old peak in the late 1990s – commodities would have to rally 46% from today’s levels.
If stocks drop 20%, commodities would still have to rally 88% for the ratio to get back down to its average. They’d have to rally 18% to bring the ratio back to 16.
Commodities are extremely cheap relative to stocks today. This is a fantastic buying opportunity. Be sure not to miss it.
Good trading,
Ben Morris
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Source: Growth Stock Wire