Why Commodities are so important?

The reason commodity prices are so important to the Market Correlation picture is that they play a major role as a leading indicator of inflation. Trends in the Commodity markets tell us a lot about the strength of the economy, which way inflation is heading and the direction of Interest Rates.

Commodity prices influence Bonds, which then influence stocks. They trend in opposite direction of Bond Prices. Keep in mind, that Commodity Markets represent prices in their raw material stage. Turns in Commodity prices usually precede turn in broader gauges of inflation such as CPI and PPI.

Stock Market Impact

A rise in Oil and Gold can cause pain to Bond bull Traders. Gold, Oil and Copper have a direct bearing onthe stock market sectors that are tied to these commodities. By watching crude prices, which are first in the chain of production trends, one can sometimes spot inflation in the pipeline.

Remember that Copper is use to build autos and homes and is very correlated with the S&P Index. It also very correlated with Bond prices creating an inverse relation between Copper and Bond prices. If Copper start to rise, that means economic strength and that will push Bonds prices lower and Interest Rates higher. On the other hand, falling Copper price means economic weakness.

Bond Market Impact

Commodity prices, represented by the CRB Index, trend in the same direction as Treasury bond yields and in the opposite direction of Bond prices.

Turns in the CRB Index often leads turns in the Bond market and one has to consider that Commodity prices trend in the opposite direction of Bond prices creating an inverse relationship.

Printing Money values Commodities

Whenever governments have printed money throughout history, people put their money in real assets, whether it's rice or silver or natural gas. People protect themselves against inflation.

As for supply: "Commodities are based on supply and demand. You can have demand go down, but if supply goes down more you are going to have a bull market. Price of energy has a psychological effect on inflation and Gold is viewed as a traditional leading indicator of inflation.

A rise in Oil and Gold can cause pain to Bond bull Traders. Gold, Oil and Copper have a direct bearing onthe stockk market sectors that are tied to these commodities. By watching crude prices, which are first in the chain of production trends, one can sometimes spot inflation in the piepeline.