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Commodities Rebound Gaining Momentum

TOM BUTCHER: Roly, could you please update me on what's going on with commodities?

ROLY MORRIS: Since we last spoke, the commodity markets continued to perform fairly well, and this has given us more confidence that this bottom or basing that occurred in the first quarter of 2016 is likely to hold. More recently, there has been very good price action. Crude oil now has rallied to $50 off of a low of $26 in February. That represents a 90% gain year-to-date. From the beginning of the year, oil is up about 35%, and that's from looking at the spot month. That's very good performance. If you look at the commodity broad indexes, they are up about 12% for the year. But more importantly, they are up more than 20% from their lows in January. Most people believe that this is an indication of the beginning of a new bull market. For us, this would be very exciting and could really confirm marking a low in commodities. And it has been a long, painful cycle, but it's very exciting to us that, potentially, we have seen the low in the first quarter of 2016.

BUTCHER: Roly, what affect upon commodities do you think the rather disappointing recent figures on the U.S. economy and employment will have?

MORRIS: Interestingly, those signs of weakness indicate that the U.S. economy appears to be slowing slightly. That will keep the U.S. Fed from tightening, and it will delay the Fed's hope of normalizing rates. After the most recent numbers, which were surprisingly weak, particularly the unemployment number, the Fed is not likely to tighten in June or July. That means the Fed's next opportunity is September. This hold on raising rates is quite helpful for commodities for a couple of reasons. One, it contains the U.S. dollar and keeps it from appreciating. Any weakness in the dollar is very helpful for commodities. Additionally, because the U.S. central bank (Federal Reserve) is considered the central bank to the world, its decision to maintain an easy monetary policy will actually help economies outside the U.S. Capital flows can return to emerging market economies. If those currencies strengthen because of U.S. dollar weakness, it allows those economies to ease their monetary policies. In essence, the U.S. decision to backoff from tightening interest rates is tantamount to easing for the entire world. This could be very helpful to commodity demand, and really could set the stage for even further price appreciation.

BUTCHER: What's your outlook for the second half of the year?

MORRIS: As I have said, there is this very positive backdrop, but the fundamental thing that we've been focusing on is the supply response, which has been in place for a year or two. All the capital reductions, particularly in the energy and mining sectors, has reduced supply. And the oversupply problem is gone. This is very supportive for commodities through the second half of this year. And if we get further indications that the Federal Reserve is going to maintain an easy monetary policy for even a longer period of time, this could help create increased demand outside the U.S., and support price appreciation even more. Overall, we think prices will be well supported and climb slightly higher throughout the rest of the year.

BUTCHER: Wonderful and thank you Roly.

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