La Niña Modoki And Is The Commodity Boom Over?

Climate forecasters have predictably run into the ‘spring barrier’ when models have a harder time making accurate forecasts during this time of the year, spawning in the process varying outlooks on the projected change in the sea-surface temperature (SST) patterns in the Equatorial East Pacific. However, my in-house long-range weather forecast program, Climate Predict, can give some historical clues, as to what will happen with La Niña in the months ahead.

The phrase ending with ‘Modoki’ (Japanese for “similar, but different”) represents an event that is not “as qualified” as the genuine event. During a La Niña Modoki event, a colder central Pacific is flanked by a warmer eastern and western Pacific. Classical La Niña has warmer waters over the western Pacific; El Niño is the exact opposite.

Climate researchers say that since the 1980s, classical El Niño and La Niña events have become rare and that a second ‘flavor’ - in the form of Modoki - has evolved and become more prevalent. Both El Niño and La Niña Modoki events can occur when tropical ocean indices do not achieve thresholds of a canonical El Niño or La Niña event.

The maps above show how the eastern Pacific (Nino1+2) is warming a bit, but it is still slightly cooler than normal in the western Pacific. La Niña Modoki is a bit unusual.

Is the Commodity Boom Over? Where to Invest

After 10 years of under performance, commodities began booming later in 2020. Crude oil soared more than 100%, grains some 30% on global weather concerns and strong Chinese demand, plus rising silver and copper prices, due, in part, to the expansion of electric car manufacturing, new technologies and the green economy.

Companies like Goldman Sachs have been touting “the beginning of a much longer-term structural bull market’ that could rival the 1970s when crude oil traded over $120 a barrel and gold rose 25- fold. However, I disagree with this scenario that all commodities will be in a bull market. We have seen a stronger dollar and wheat, crude and gold prices collapse. Students of previous commodity bull markets are aware that the first mover in a synchronised rotational commodity upswing is usually gold, as this is the first to react to excess monetary creation. Last year, gold hit an all-time high as measured in all major currencies – not just the U.S. dollar. Since the U.S. came off the gold standard, in 1971 under President Nixon, the dollar has lost 98% of its value versus gold. Despite recent weakness, gold remains in a primary bull market, but gold is not the only commodity to offer a hedge against currency debasement – copper, silver, nickel, wheat and coffee are all eventually just as inflation-proof as gold. It is just that all these commodities do not go up at the same time and tend to trade in rotation. Over the recent 10 year period, commodity prices are only up about 10% versus, of course, a stellar 150% rise in the S&P 500. In the chart below, see how commodity prices broke above the bearish trendline a few months ago, due to global weather problems, demand surging from China and expectations for worldwide post-Covid economic expansion. However, right now we need to see major summer weather problems and a sell-off in the dollar again in order to see this commodity boom continue.

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