Baltic Dry Index - Excellent Economic and Commodity Price Trend Indicator

In this article I would like to make readers aware of the Baltic Dry Index and why it is an excellent indicator of the economy and also the price ternd for commodities. Just tracking the Baltic Dry Index is an easy task and requires no big research or analysis skills but can help individuals in a great way to make investment decisions.

What is Baltic Dry Index (BDI):

The baltic dry index is a measure of shipping activity in dry cargo. It gives the daily average price to ship raw materials. This prices is the average price paid by the customer to ship the raw material across the seas.

How is Baltic Dry Index useful to Investors:

• Baltic Dry index is one of the purest economic indicators. Unlike commodities, there is no element of speculation in this.
  

• Dry cargo, whose shipping cost is measured by BDI mainly consist of commodities such as coal, steel, iron ore,copper, cement and others. So any drastic fall in the index indicates slump in demand globally for these commodities. On the other hand, any surge in the Baltic Dry Index is an indicator of increasing demand for commodities globally. I will make my point more clear when I discuss the BDI chart below.

• Baltic Dry Index values also have a high positive correlation with the equity markets. Thus, when the BDI increases, there is a high probability that the stock markets would also rise.

• Investors are also concerned about the state of the economy and are interested in knowing how good or bad the quarterly GDP numbers would be. The BDI helps investors in determining this as well. If for the whole quarter the BDI has gone up then it would mean that the economies globally are not doing that badly.

Five Year Baltic Dry Index Chart: (Chart Source: Bloomberg)


To View the chart more clearly please open it in a new window.

This chart shows the movement of the Baltic Dry Index from mid 2004 to April 2009.

• The Baltic Dry index peaked out at 11,793 on 20th May 2008. Note that the commodity prices also peaked out at around the same time.

• The Baltic Dry Index then crashed to 666 by 4th December 2008. This was the time when the commodity prices hit the bottom and the global economy had slumped during the October to December quarter. It is also worth noting that the equity markets also had a major crash in the second half of 2008. So as stated earlier the index and equity markets showed a high positive correlation.

• After December the Baltic Dry Index again moved up to reach 2298 levels on 10th March 2009. This clearly indicated that the there is some activity and life coming back to the global economy and the stock markets have also reacted positively to this by surging over 34% in the last one month.

So clearly the index is a great indicator of global economic activity and also of the commodity price trend. We have seen a big recovery in commodity prices in the last few months. Anyone who was tracking this index would have got a sniff of upside in commodity prices much earlier and would have positioned himself/herself in commodity stocks.

All investors can easilly track this index on Bloomberg which is a source of the chart above. In the chart there is another data point called the relative strength index (RSI). i would like to explain what a RSI is so that investors can use this as well for determining when to buy or sell commodities or commodity stocks.

The Relative Strength Index can have values between 0-100.

• A RSI reading of 70-80 is a sell signal. It usually indicates that commodities are overbought.

• A RSI reading of 20-30 is a buy signal. It indicates that in the near term commodities are oversold.

So in all the Baltic Dry Index can be a great tool to make investment decisions and also predict the direction of the economy. Most importantly its easy to understand and can be looked into by all investors as it needs to great analysis at all.

Also Read my Other Recent Articles:

• Best Long Term Investment Themes

• 10 Value Creator Stock Picks for Long Term