Over the last year, the futures markets have exhibited a tendency to trend unlike any year since 2008. That was the last year where there was significant disequlibrium in the markets.
In 2008 it was clear that the financial markets were in significant trouble as the collapse in the residential real estate market was causing significant damage to the economy. This was coupled with a massive increase in global oil prices (followed by a precipitous decline due to the collapsing global economy).
The result was a collapsing economy that ultimately forced the Federal Reserve and other central banks to embark on their quantitative easing policies.
This lead to massive moves in currency and interest rate futures.
Many money managers who participate in the futures markets known as Commodity Trading Advisors (CTAs) and who employed a trend following approach to trading in these markets generated very strong returns in 2008.
Over the last year, a number of CTAs who employ a trend following approach have again experienced significant returns.
As a result of the Covid-19 pandemic, the central banks around the world have been printing money furiously to avoid economic catastrophe.
This time, the results have been a bit different. While there have been some significant moves in interest rates and currencies, the more eye opening trends have occurred in commodity markets.
Let’s have a look at some of the more significant trends over the last year.
The most spectacular market in the last year is crude oil. At one point on the day crude oil hit its low price in April, it was reported that it actually traded well below $0 in the spot market. For a long term investor, that was THE buying opportunity of a lifetime, if you had the cajones to step in!
Silver seemed to be the favorite among many investors looking for a way to hedge against inflationary risks.
After its bottom in March, silver did make a pretty significant move to near $30. However, it has stalled since, as some investors now fear that once again, deflation could be the issue to worry about in the long run. Time will tell.
The rise in lumber futures from April to August was truly spectacular. Lumber prices are now at all time highs and these prices are driving up the costs of new homes substantially. However, the Fed doesn’t seem to mind that home prices are rising at a 5%-10% clip, depending upon location.
Adding to the cost of new home construction is this rise in copper prices. Copper is now trading near its 2011 highs, nearly doubling in price since the March low.
The last chart I am presenting is soybeans. This is one of the more spectacular trends I’ve seen in soybeans, and it is apparently reminiscent of the 1970’s. Soybeans are now trading at their highest level since 2014.
I should note that there have been significant moves in other commodities such as corn, cotton and palladium.
The last major commodity bull market was the period 2004-2007. There was a brief move up again from 2010 to early 2011 when gold and silver peaked.
Since then, however, commodity prices have been relatively tame.
Nobody knows what the future holds, but Fed Chairman Powell has made it clear that the Fed will not be tightening anytime soon, and the House of Representatives just passed a $1.9 trillion stimulus package.
With this in mind, it would appear that, in spite of the Fed worrying more about deflation, we may be in the early stages of a new inflationary cycle.
If this is the case, we should continue to see significant trending moves in commodities as well as in interest rates and currencies.
With that in mind, it may be time for some investors to allocate a portion of their portfolio to these markets.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.
TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.
YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES.