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Gold No Longer Leading The Parade (NIB, JJS)

December 21st, 2010

The leading edge of the commodity bull market was, for a long time, the price of gold. Note the word was. Now, I’m not saying bullion’s story has been written for the decade, but clearly gold’s been overtaken in the Great Commodity Race.

Witness the ratio of gold’s price to that of the Thomson-Reuters/Jefferies CRB Index, a benchmark that originally dates back to 1957 when it was launched as the Commodity Research Bureau Index.

The current TRJ/CRB Index covers 19 commodities, including gold. Gold’s price trajectory relative to that of the broad-based TRJ/CRB Index has been on the wane since June, but has recently broken to the downside of a wedge pattern to point to even lower ratio values.


Gold/CRB Index Ratio Breaks Down

Gold/CRB Index Ratio Breaks Down

Two things can account for gold’s diminishing impact on TRJ/CRB: Gold’s price could be flagging and/or the price trajectory of the index’s other components may be accelerating.

Recently, both factors have played out. Gold peaked in the first week of December and has been ratcheting lower while other commodities have been ascendant.

Bullishness in the petroleum sector—the index’s heaviest-weighted sector—has certainly driven TRJ/CRB higher. Since the beginning of June, spot crude oil’s climbed 21.3 percent, gasoline’s motored 16.4 percent higher and heating oil’s temperature has risen 24.8 percent.

The real fire, though, has been lit under the softs. A quick look at the soft commodities tracked by exchange-traded securities products reveals three out of four—cotton, sugar and coffee—are technically overbought. Cocoa has more recently snapped into overdrive (see “Cocoa Getting Hot,”) but hasn’t yet been worked up to a – you should excuse the pun – froth.

The soft sector is tracked—collectively and individually—by iPath exchange-traded notes. The net asset value of the broad-based iPath Dow Jones-UBS Softs Subindex Total Return ETN (NYSE:JJS) is, more or less, equally weighted in cotton, sugar and coffee, and has risen an eye-popping 95.6 percent since June 1.

Softs will eventually come in for a, um hard  landing, but further spikes are likely before the fever’s broken. In the meantime, value-minded commodity investors might want to consider taking a sip of cocoa—accessible through the iPath Dow Jones-UBS Cocoa Subindex Total Return ETN (NYSE:NIB)—before it too boils over.

Written by Brad Zigler From Hard Assets Investor

HardAssetsInvestor.com (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.

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