Middle-East Chaos Could Ignite A Spike In Commodity Prices
Posted in CRB Total Return Index (CRB) on January 31st, 2011 by admin – Be the first to commentBy Jim Donnelly, Olson Global Markets
With volatile political conditions erupting in the Middle East, commodity prices could spike higher as momentum buyers take on more risk. Crude oil prices reversed sharply higher on Friday, as did precious metal prices, causing the Reuters/Jefferies CRB Total Return Index (CRB) to jump by 1.2% to 335.44. Although overbought conditions are now present on long-term charts, technically the problem is that the CRB index could rise much, much higher.
After breaking solidly above key “cross†trend line resistance at 320 on long-term charts, it is possible to see the CRB index eventually move up to test the “backside†of former trend line support (now resistance) currently sitting at the 399 level and rising over time. If that were to occur, it would represent a nearly 19% jump in commodity prices from current levels. In turn, that would likely exacerbate the “food inflation†problem that has aided much of the political unrest abroad.
It would also have the potential to retard economic improvements in U.S. At the very least, additional commodity price increases would likely narrow many a profit margin and stunt earnings growth in the months just ahead.
On the other hand, if tensions in the Middle East were to abate, a break below former trend line resistance (now support) at 320 on the CRB would have to be considered a very big plus for a number of global economies (including the U.S.) and therefore equity investors as well. From this vantage point, however, that kind of scenario does not appear likely to play out any time soon, particularly with the level of uncertainty that now exists.