The recent uptick in purchasing managers’ indexes in both China and the developed world has led to some optimism that a rebound in commodity demand and prices is just around the corner.
This view is largely based on previous experiences of rising PMIs being accompanied by stronger consumption of natural resources, and both data evidence and logic support the historical argument.
However, like the legal disclaimers that accompany investment brochures, it’s worth noting that past performance is not always a reliable indicator of future outcomes.
The positive case is that the global PMI for October accelerated to 51.4 from September’s 50.7, the strongest monthly gain in nearly two years. October’s reading was also the first timer since March that the global PMI had moved above its three-month moving average.
Frank Holmes, the chief executive of fund manager U.S. Global Investors, said in an article published Nov. 9 that this is an indicator he watches “very closely because in the past it has reliably anticipated how commodity prices might behave in later months.”
“Our own research shows that when a PMI ‘cross-above’ occurs … it has signaled a possible spike in certain commodities, materials and energy,” Holmes said.