A Tale of Two Charts

What's really going on in the commodity markets?

You'd be hard pressed to find a positive story on commodities lately, with pundits citing oil's decline, the lack of hurricane disaster, and calming tensions in Iran as reasons to turn bearish. Indeed, if you looked at the chart directly below, you'd be hard pressed to disagree. It plots the CRB's futures index, which is an average of various commodity futures prices. Note that it has turned decidedly downward since mid-August.

Now take a look at the next chart. This one plots the average spot price of various raw materials—the actual physical goods. Note that it shows the exact opposite trend, steadily increasing throughout 2006.

So, which one is right? Is the futures market correct in forecasting a downturn in commodity prices? Or will the spot market prove the futures market wrong? Time will tell. But this is a perfect example of how two very similar series can lead to very different results. The lesson is clear: never dogmatically focus on just one chart to form your investment conclusions.