When it comes to commodities and inflation everyone seems transfixed on the performance of what we call the “Big Five”, that is, crude oil, gold, aluminium, heating oil, and wheat. OK you may disagree as to exactly what the big five are but to us that disagreement is merely rhetoric! The fact is that if you look at the performance of the big commodity tracking indices they appear to have gone nowhere since the start of June and are barely changed since the start of the year. This dismal performance in essence is the reason why the deflationists/dooms-dayers are real excited claiming that the world economy is not improving etc and that there are no inflationary pressures developing in the “foreseeable” future.
But outside the realms of commodities followed by the popular crowd (i.e. commodities not included in the CRB Index) the situation is very different indeed.
We decided to put together our own commodity index which constitutes what we think are the five biggest commodities (in terms of their importance to daily life on this planet) not popularly tracked by analysts of the common variety. We call this index the “Lesser Spotted Five” commodity index. The constituents are as follows: rubber, coal, polyethylene, wool, pulp. These commodities are not widely followed but are vital to industry and consumers alike and are also very unlikely to be the subject to any price manipulation (which we would not be surprised to see in the big five). Accordingly, the price performance of the “Lesser Spotted Five” commodity index should be far more representative of inflationary pressures and/or the level of industrial activity.
We compare our Lesser Spotted Five with the Big Five (using DBC as a proxy, yes it is made up of six commodities but if we dropped corn it would not look materially different).
Our Proprietary Commodity Index – The Lesser Spotted Five
Powershares DB Commodity Index Tracking Fund – DBC
We think that the pictorial representations above say a thousand words! It may not be obvious to the average punter/investor/analysts but to us the inflation and higher commodity prices are trending higher. Perhaps it is only a matter of weeks (if not days) before the conventional commodity indices break to multi-week highs.
