Data Diary

RBA Commodity price index (May10) – gold up, base metals down

Posted on 02 June 2010

The RBA released its monthly commodity price index for May10 yesterday (you’ll find it here).  Perhaps surprisingly, the overall index was up.

The fact that it continued to climb is partly a function of its composition (see here for a breakdown – note gold makes up a handy 9.5%) and partly the way it is calculated (eg. the effect of recent increases in iron ore contract prices are spread over time – notwithstanding Chinese spot iron ore prices were down on the month).  In this context, it’s notable that gold has continued to outperform base metals:

And that at least for our dataset, the base metals to gold ratio is once again approaching historical lows.

I’ll admit to being a little nervous about gold’s prospects to push on from here.  The logic of owning gold over the longer term horizon is sound – there is a certain inevitability to the destruction of the paper money idol.  But in the immediate future, it’s harder to see the catalyst for another surge higher (other than the technical one – it’s a cup and handle thing).  A stop seeking shot to the downside would do me the world of good – maybe it’s wishful thinking…

Anyway for our purposes we focus on the RBA’s US$ base metal index. We combine this with the Baltic Dry Index (as a proxy for volume) and the Shanghai stock market (as a proxy for Australia’s biggest customer) to get a benchmark for the ASX200 Material Sector.  This indicator has rolled over and is threatening to break its recent lows: