Category: Commodities

If you wanted to focus on three longer-term macro factors that will drive overall commodity prices, it will be global growth, the dollar, and liquidity. The determination of long-only allocations in any asset allocation should focus on these three. Trading issues will be driven by volatility and market shocks.

It has been a tough period for making money in commodities especially if you have been a long-only index investor. When the super-cycle turns down, there is no place to hide even trading from the short-side has been challenging. Both momentum and carry-based approaches for finding opportunities have suffered during this period of prolonged decline; […]

With a new regulatory environment, the traditional gold market is up for grabs. While many of the changes have not been direct to the gold market but based on a broader environment, regulation is changing the market structure for trading in gold. Regulations which increase the cost of trading over-the-counter has and will push gold trading onto exchanges, centralized counterparts (CCP’s). This environmental change is the opportunity for new exchange entrants in the gold market. We have already seen new trading through ETF’s over the last few years change gold dynamics and now there is the opportunity for changes in futures trading.

There has been increased interest in commodities and real assets with the increase in inflation. Commodity price as measured by the Bloomberg commodity are off the lows since February of last year, but he markets are still digesting the adjustments in demand and supply since the Great Financial Crisis. Most markets are still in contango because of high inventory levels. These contango levels have fallen over the last year, but are not like the long periods of backwardation during the 90’s and commodity super cycle. This places a significant roll drag on performance for pension funds that may choose to buy an index.

From the high in June 2008, the Bloomberg Commodity index (formerly the DJ-UBS index) is still down from its high by 61.6%. The index is off the all-time lows since the crisis which was reached last February 2016 by about 16.5%, but the index is nowhere near old highs.

Commodities were supposed to be the great portfolio diversifier, a real asset that protects against inflation, offered positive roll yield, and gains from a super cycle. The reality over the last eight years has been much different. The roll yield disappeared as markets turned in many cases from backwardation to contango. Investors were penalized with negative roll. The super cycle ended with the Great Financial Crisis with a market decline over 75%. The markets have been digesting an excess supply/demand imbalance for years. The final kicker for investors was the financialization of commodities. Correlations with equities rose so investors did not get the diversification free lunch that was expected from looking at historical data. Now times are different, so throw out the old thinking.

Commodities have been an out of favor asset class. With a long-term return downturn, that has only partially reversed, many have avoided commodities even though it has been one of the best performing asset classes for 2016. A return of over 5% through November 11th as measure day the DJP total return has made it a strong gainer albeit the reversal in oil has caused declines from highs earlier in the year.

The world grain trade has been shocked in 2016 by the speed with which the entire exportable surplus from a large Brazilian soybean crop was consumed. While statisticians’ opinions differ, the more astute extrapolated early on from the pace of vessel loading that importers would not only come with equal alacrity for the U.S. crop next fall, they’d even need to tap more U.S. supplies yet this crop year. In short, demand for soy meal, a high-quality, high-protein feed ingredient key in efficient meat production, is beyond anything anticipated.

We know of very few commercial entities or traders that were positioned last month to reflect much possibility that soybean prices at CME might be far too low. Plenty of different explanations have been offered as to the source of last month’s abrupt price explosion of grains and oilseeds prices. These can be roughly divided into two groups, “game theorists” and “statistical analysts.”

Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein Most of our expectations are just knee-jerk reactions to day-to-day details, but today’s headlines rarely reflect tomorrow’s reality meaningfully. For example, how many tectonic changes in different areas of our lives have and continue to occur, only dimly perceived even by those attentive to […]