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Summary

  • All sectors post losses in Q1- Double-digit percentage declines in three of six sectors
  • Energy is the biggest loser with an over 60% loss in WTI and Brent futures and gasoline
  • Double-digit percentage losses in most commodities
  • Double-digit percentage gains in two commodities
  • FCOJ is the biggest winner- Crude oil leads the way on the downsideThe raw material markets posted a significant loss in the first quarter of 2020 as the global pandemic caused a deflationary spiral taking the prices of most assets lower. The commodity asset class consisting of 29 of the primary commodities that trade on US and UK exchanges moved 17.77% lower in Q1 compared to the level at the end of the year that ended on December 31, 2019. Last year, the asset class gained 10.98%. In 2018 the asset class lost 6.82% of its value.

    Commodities were up 7.95% in 2017 following on the heels of 13.41% appreciation in 2016. The overall winner of the 29 for the first quarter was FCOJ that posted a gain of 23.66% for the three-months with palladium in second place with a 20.71% gain. The biggest loser for the quarter was the NYMEX crude oil that fell 66.46% with Brent crude oil in second place on the downside with a 65.40% loss in Q1. The price of nearby NYMEX gasoline futures fell 64.94% over the period.

    There were two double-digit percentage gainers in Q1 most raw material prices posted double-digit percentage losses during the first three months of 20209. Losers outnumbered winner in the quarter that ended on March 31, 2020, by a margin of over four and one-half to one.

    The U.S. dollar is typically a significant factor when it comes to commodity prices, as it tends to have an inverse value relationship with raw material prices. The dollar index posted a 3.16% gain in Q1. The dollar index was 0.34% higher in 2019 after moving 4.26% higher in 2018, which followed a 10.23% decline in 2017. The dollar rose in Q1 as volatility in the currency arena increased dramatically, and trading ranges widened.

    The Fed pushed the Fed Funds rate to 2.25-2.50% at the end of 2018. However, 2019 has been a year of reversal for the US central bank. At their June meeting, the Fed cited inflation below the 2% target rates and “crosscurrents” from Europe and China as weighing on global economic conditions as reasons for its more dovish guidance when it comes to the path of the Fed Funds rate. Lower interest rates are bullish for commodities prices as they weigh on the value of the US dollar and lower the cost of carrying inventories. The Fed cut rates by 25 basis points at the July 31, September 18 FOMC meetings, and again in October. While the Fed did not lower the short-term rate in December, members of the FOMC and Chairman Powell told markets not to expect any changes in monetary policy in 2020, but they did not anticipate the deflationary spiral in the form a global pandemic. The March 3 fifty basis point cut led to a decline in the Fed Funds rate to zero less than two weeks later. Quantitative easing is back, and bigger than ever in the US and Europe as central banks seek to stabilize markets until scientists can come up with treatments and a vaccine for the virus. The market action was a symptom of the virus, unlike in past risk-off periods where economic events were the root cause.

    The first quarter began on an optimistic note as the “phase one” trade agreement, and the path to Brexit lifted hopes of global growth. The Coronavirus started in China, and its spread across the globe caused a tsunami of selling in markets across all asset classes. By the end of the quarter, markets had declined as the number of cases, and fatalities around the globe continued to rise. As of March 31, New York City was under siege as a result of the pandemic. Countries and cities around the world were under lockdown conditions, and business activity ground to a halt. President Trump extended social distancing guidelines until April 30, under the advice from scientists warning that the virus would not peak in the United States for some time.

    Stocks plunged in the first quarter as the prospects for corporate earnings evaporated. The DJIA fell by 5.63% in 2018 and posted a gain of 28.88% in 2019. In Q1, the DIJA lost 23.20%. The tech-heavy NASDAQ fell 3.88% in 2018 but moved 35.23% higher in 2019 as of the close of business on December 31. In Q1, the NASDAQ was 14.18% lower. The VIX index closed 2018 at 25.42. The volatility index was at 13.78 at the end of 2019. On March 31, 2020, the VIX had exploded to the 53.54 level after trading to the highest level since 2008 at 85.47 on March 18. As we head into Q2, the virus continues to create fear and uncertainty over the future. Commodities are essential goods that feed, clothe, shelter and provide energy for people all over the world. While interest rates have declined to lows, which lowers the cost of carrying inventories, the reason for the decline has been a deflationary spiral. Energy prices plunged after OPEC and Russia decided to abandon production quotas and flood the world with crude oil at a time when the virus caused unprecedented demand destruction. The price of crude oil fell below the $40 per barrel level and halved by the end of the quarter. Russia and Saudi Arabia may have attempted to push US producers from the market to increase their market share, but the move that sent the price of petroleum to close to the lowest level of this century has done damage to the Saudi and Russian economies as well.

    Grains were the best-performing sector in Q1 as the agricultural commodities that feed the world fell by under 4%. Precious metals fell by under 5.50% as platinum and silver prices weighed on the sector. Soft commodities were just under 8.8% lower. The Brazilian real moved to a new multiyear low, putting pressure on coffee and sugar prices as the lower cost of production weighed on prices. Emerging markets were victims of the impact of the virus on world markets. All six sectors of the commodities asset class posted gains in 2019 on a year-on-year basis. In Q1, all six declined.

    The geopolitical landscape took a backseat to the global pandemic as Coronavirus does not discriminate based on nationalities, borders, race, religion, wealth, political ideology, or any other factors that divide people around the world. The microscopic virus threatens all human beings on our planet.

    Political divisiveness remains in the US as the nation heads into the Presidential election in November. Former Vice President Joe Biden is likely to face President Trump in the contest, but the election will be a lot different than in the past given social distancing guidelines. President Trump became a wartime leader in Q1 as the virus takes precedence over politics. The US Senate voted to acquit President Trump on two articles of impeachment in Q1, but the spread of the virus has thrust the President into the commander-in-chief position along with Governors who are addressing the virus in their respective states. The election will hinge on how the President deals with Coronavirus and its effect on the nation and its economy. The Trump administration and both houses of Congress worked together on stimulus measures aimed at stabilizing the economy and buying time until scientists can find treatments and a vaccine.

    Brexit occurred at the end of January, but the UK was facing mounting cases of Coronavirus at the end of Q1, with both Prime Minister Boris Johnson and Prince Charles testing positive for the illness. Italy and Spain were suffering staggering losses of life at the end of March, and most countries in Europe were in lockdowns in an attempt to slow the spread of the virus.

    The beginning of spring typically impacts commodity markets as some prices move higher or lower because of seasonal factors. Natural gas fell to the lowest level in twenty-five years in March at $1.519 per MMBtu on the back of high levels of inventories. Natural gas tends to make annual lows in the early spring. Gasoline futures tend to hit lows during winter months. The price of the fuel fell to a low of 37.6 cents per gallon, the lowest since 1999 on the back of demand destruction as the economy ground to a halt. The spring is the start of the planting season in the US, and the uncertainty of the weather conditions tends to increase price volatility in grains and agricultural products. In ordinary years, the weather is the primary determinate of the path of least resistance of prices. The end of May is the start of the 2020 grilling season when animal protein consumption tends to rise. Meat prices fell to the lowest levels in years during the first days of Q2. As we head into the second quarter, 2020 is anything but a typical year in all markets, and the spread of Coronavirus is the primary issue that will influence prices over the coming months. Moreover, the economic fallout from the pandemic will affect prices in the years ahead.

    A myriad of complex factors on a macro and microeconomic basis with dictate the price direction for the commodities market over the coming three months and beyond. The pandemic is the most significant factor facing markets across all asset classes, and that will continue for quite some time.

    The Invesco DB Commodity Tracking ETF (DBC) product is one of the most liquid macro commodities products with a substantial weighting towards crude oil and energy commodities.

    Winners in Q1

    During the period from January through March 2020, none of the commodity sectors posted gains. The two double-digit percentage gainers were FCOJ, which was 23.66% higher. The soft commodity recovered after spending most of the quarter below the $1 per pound level. Palladium was 20.71% higher, adding to gains of 59.48% in 2019. However, palladium became highly volatile during the risk-off selling caused by Coronavirus.

    Soybean meal, a primary ingredient in animal feed, rose 7.20%, and rice a staple food around the globe was 6.85% higher. Gold rose 3.96% on the back of record stimulus that weighs on the value of fiat currencies. CBOT wheat and KCBT wheat were 1.79% and 1.44% higher, respectively. Only seven commodities posted gains over the first three months of 2020.

    Losers in Q1

    All sectors of the raw material asset classes posted losses in Q1. Energy was the leader on the downside with a 51.02% decline. The composite of animal protein prices fell 20.45% as the prices of cattle and hogs declined. The economically sensitive base metals sector fell 17.09%, while soft commodities were 8.79% lower. Precious metals fell 5.44% despite gains in palladium and gold as percentage losses in silver and platinum weighed on the sector. Grains, the sector that feeds the world, posted a 3.81% decline for the quarter.

    The three worst-performing commodities of Q1 were NYMEX crude oil, which was down by 66.46%, Brent crude oil dropped 65.40%, and gasoline declined 64.94%. The commodities that fell over 50% included heating oil futures that were 50.49% lower. The Baltic Dry Index fell 49.72%.

    Ethanol, the biofuel shed 33.75% on the back of weak gasoline prices. Corn is the primary ingredient in ethanol production in the US, and sugar is the input in Brazil. Both corn and sugar prices posted double-digit percentage losses in Q1. Lumber declined by 31.29%.

    Many commodities were down over 20% for the quarter, including a 26.92% drop in the price of lean hogs, a 25.95% loss in cotton, a 25.43% drop in platinum, and a 25.08% decline in natural gas futures. Copper on the LME fell 22.17%, and on COMEX, the red metal lost 20.34%. Sugar futures moved 22.35% to the downside, and soybean oil lost 21.69%, and silver was down 21.09%.

    Those commodities losing between 10% and 20% were LME nickel with a loss of 19.73%, LME zinc down 17.93%, LME aluminum down 16.68%, feeder cattle futures off 16.10%, and LME tin which lost 14.78% of its value. The price of corn futures fell 12.12%, while cocoa was 11.46% lower. LME lead was the best-performing nonferrous metal, but it dropped 11.23%.

    Iron ore fell 9.66%, coffee lost 7.83%, and MGE wheat was 3.88% lower.

    Gasoline and heating oil processing spreads reflected demand destruction in Q1. The gasoline processing spread fell 56.84% as people in the US and around the world remained in their homes. However, the smaller decline of 10.25% in the heating oil crack spread reflected the continued operation of the supply chain bringing goods to market. Heating oil is a distillate fuel that is a proxy for diesel and jet fuels. While airline travel is declining dramatically, trucks are bringing good to market to feed people during the pandemic.

    The CFTC has defined digital currencies as commodities. The cryptocurrency asset class that was all the rage in 2017 plunged in 2018. In 2109, the digital currencies made a comeback, but the risk-off conditions weighed on many of the members of the asset class in Q1. The market cap of the asset class as a whole moved from $191.935 billion at the end of Q4 2019 to $181.094 billion on March 31, down 5.65% for the three-months. Bitcoin fell 10.88% in Q1 after a gain of 93.65% in 2019. Ethereum posted a 2.48% gain in Q1, while Litecoin was 6.66% lower for the period. Bitcoin Cash was 6.72% higher. Some of the cryptocurrencies were not immune to the deflationary spiral.

    Issues to look forward to in Q2 2020

    Optimism is the most significant factor for people to remember as we head into the second quarter of 2020. At the start of the quarter, we will likely see the number of cases and loss of life to the virus rise. Scientists are hopeful that the warmer weather conditions in the Northern hemisphere will slow the spread. They are working furiously on treatments and a vaccine that will remove the dangerous threat of infections.

    Meanwhile, most people will remain at home, washing hands, and practicing social distancing. The lack of revenue at companies will eat away at value. The bull market in stocks was a victim of the virus as the bull passed away in February, and the bear emerged. The economic costs of the global pandemic will be staggering, which will weigh on markets over the coming months and years. When it comes to commodities, lower prices are likely to lead to production declines. As prices reach levels where production falls, inventories are likely to begin to drop as the raw materials are the products that feed, clothe, power, and shelter over 7.6 billion people on our planet. Even after the tragic loss of life from the global pandemic, the population will continue to grow. Economic stagnation is likely to remain in the aftermath of the virus. The stimulus will weigh on the value of fiat currencies and boost government debt levels around the world. The decline in the purchasing power of fiat currencies could eventually cause commodity prices to skyrocket, causing periods of stagflation, an economic condition that is difficult to manage. Watch grain and agricultural markets closely as the weather conditions and problems with the supply chain could cause more volatility than usual in the current environment.

    I expect price variance in markets across all asset classes to remain at very high levels throughout Q2 and beyond. Trading rather than investing could provide optimal results. Approach all risk positions with a plan, stick to stops, and take profits when they are on the table. Fundamental and technical indicators may not work as well as in the past, given the dramatic changes in economies and behaviors around the world. Look for commodities and stocks that are likely to continue to attract demand in the current environment. Be cautious when taking positions home overnight or over weekends. Government policies could influence markets over the coming weeks.

    Most importantly, stay safe and take care of the vulnerable. Believe in science, as it will eventually come up with the solution. Unfortunately, as we head into Q2, the virus and markets move far quicker than the scientists scrambling for treatments and preventative answers.

    History- Results from my best bets for Q1

    The results of my best bets for Q1 from my Q4-2019 report are as follows:

    • The stock market is at record levels at the end of 2019. While stocks could continue to rise during the first half of the year because of low rates, the US election could cause periods of selling as a shift in tax policy could hit stocks like a ton of bricks. I continue to favor buying VIX-related instruments on price dips.

    This was my best call at the end of 2019. The VIX exploded higher and long positions offset some of the many losses in other assets in Q1. The VIX reached a peak of 85.47 in March after reaching a low of 11.75 in January.

     

    • We could see further selling in the dollar index as the fear and uncertainty surrounding Brexit has abated. However, rate differentials continue to support the dollar. I would be a better seller of the dollar index on recovery rallies with tight stops.

    The dollar index was highly volatile in Q1 with opportunities on the up and the downside.

    • I favor buying Bitcoin and other cryptocurrencies with very tight stops on dips in Q1. A rebound is overdue, but the risk continues to be on the downside with the Chinese crackdown on the digital currencies. An ETF product would be highly bullish for the asset class.

    Bitcoin and cryptocurrencies rallied with Bitcoin rising above the $10,000 level in February. However, risk-off conditions pushed the prices of digital currencies appreciably lower.

    • I remain bullish on the prospects for the Brazilian real and Canadian dollar. I will use tight stops on all long positions and re-enter at lower levels if stopped out.

    Both the Brazilian real and Canadian dollar fell sharply. Tight stops protected against significant losses.

    • I am bullish on both the British pound and euro and would buy on any weakness against the US dollar. A successful Brexit could cause a rally in the pound to the $1.40 level.

    The British pound rallied briefly to the $1.3225 level in late January Brexit occurred at the end of the first month of the year. However, the pound collapsed as the global pandemic spread to Europe.

    • I am bullish on gold and gold mining stocks in Q1. However, the risk of long positions will rise with the price.

    Gold and gold mining stocks rose to new highs during Q1, and gold posted a gain for the quarter. However, the gold mining stocks collapsed as risk-off conditions in the stock market weighed heavily on gold miners. The global pandemic has caused gold mining activity to decline dramatically sending the shares of senior and junior mining companies significantly lower.

    • I am bullish on silver and silver mining stocks in Q1. However, the risk of long positions will rise with the price.

    Silver collapsed on the back of Coronavirus risk-off conditions along with the mining shares. After reaching a lower high at around the $19 per ounce level, silver fell below $12 before recovering to $14 at the end of Q1.

    • I continue to favor platinum on the long side and would purchase physical metal or the PPLT ETF product on price weakness. Nothing has changed since the last report as platinum offers the most compelling value proposition in the precious metals sector.

    Platinum collapsed to below $600 per ounce as the weak got weaker in Q1. I continued to buy physical platinum but liquidated all ETF positions.

    • Further progress on trade negotiations between the US and China could lift the price of copper to the $3 per pound level or higher. Other base metals would likely follow the red metal on the upside. I continue to favor FCX, SCCO, and DBB.

    Copper was another victim of the global pandemic, and the stocks did worse on a percentage basis.

    • Nickel is overdue for a recovery as the export bad in Indonesia starts on January 1. JJN is the nickel ETN product. Like the nickel forward market on the LME, JJN has limited liquidity at times and could be subject to severe price gaps at times

    Nickel fell sharply with the price of all industrial commodities on the back of Coronavirus and its spread around the globe.

    • Grain markets feed the world. I am bullish on soybean, corn, and wheat prices so long as progress on a trade deal between the US and China continues.

    Grains fell, but they were the best-performing sector of the commodities market in Q1 falling only 3.81%.

    • The KCBT-CBOT wheat spread continues to be at a divergent level with a significant premium for CBOT wheat futures. I favor an eventual mean revision in the spread as the long-term average is a 20-30 cents premium for CBOT over KCBT wheat.

    The KCBT-CBOT spread closed Q1 at a 75.75 cents premium for CBOT wheat, not far below the closing level at the end of 2019.

    • I favor crude oil-related stocks as they offer value in the stock market that is at record highs. I favor OIH and VLO, as well as the ERX, XLE, and VDE products in Q1 on price weakness. However, I would use tight stops on risk positions on the long side. I continue to be bullish on the price of oil but will use tight stops on long positions as oil takes the stairs up and an elevator down. The risk of a correction will rise with the price, but the potential for a price spike on the upside because of Iran remains high.

    We got the price spike on oil on January 8, but it all ended in tears. Tight stops saved lots of heartache in the energy commodities as they were the worst performing sector of the commodities market in Q1. OPEC’s decision to flood the market with crude oil caused price carnage in the oil patch.

    • I would be a buyer on any significant decline in the gasoline crack spread in Q1 during the offseason. Gasoline crack spreads tend to hit seasonal lows in January and February.

    Gasoline fell to the lowest prices in memory on the back of demand destruction.

    • A recovery in natural gas is overdue, but it is likely to run into selling on any rally. I expect a challenge of the $2 per MMBtu level in the early spring, and perhaps the 2016 low at $1.611, given the recent price action.

    Natural gas recovered to just over the $2 level where selling caused the price to collapse to a twenty-five-year low at $1.519 per MMBtu in March.

    • The risk in coffee has increased with the price, but I continue to favor the long side because of the offyear for production in Brazil. The risk-reward in sugar remains attractive, even though it is close to the high in 2019. Cotton will move with trade, progress should lift the price above 70 cents per pound, and a move to the 80 cents level is possible during the first half of the year. I favor buying cocoa on dips, given the $400 per ton surcharge on West African exports. FCOJ at under $1 per pound is at the bottom end of its pricing cycle.

    FCOJ rose sharply in a sign of problems at Brazilian ports and a lack of exports from Spain. Coffee continued to offer profits for buyers on dips. Sugar rose to a new high of 15.90 cents before collapsing on the back of risk-off conditions and selling in crude oil. Cocoa rose to a new high at just under $3000 in February before collapsing in risk-off conditions. The decline in the British pound also weighed on the price of cocoa futures. Cotton was a victim of Coronavirus as the price traded below the 50 cents per pound level in late March.

    • Cattle are expensive, and hogs are cheap. I favor lean hogs on the long side with tight stops.

    Hog and cattle prices were volatile, but both meats suffered significant losses in Q1.

    • Low interest rates in the US should continue to support the price of lumber. While lumber is an untradeable futures market, WY, WOOD, and CTT correlate with the price of lumber-I view price weakness as a buying opportunity. On existing long positions from Q4, I would use trailing stops

    All bets were off in lumber despite the plunge in interest rates. Lumber reached a high of just below $480 per 1,000 board feet before collapsing on the back of the halt in business activity.

    • Uranium at under $26 remains in the buy zone. I favor UUUU and CCJ shares with a stop in Q1

    I stopped out of all uranium related positions at losses in Q1 as the price continued to move to the downside.

    All assets fell in Q1, and commodities were no exception. The deflationary spiral caused prices to drop to the lowest levels in years. The weak got weaker. Gold was a beneficiary during Q1, but it was the metal that offered safe harbor. As we head into Q2, concentrate on the assets that are essentials. Each day we come closer to an answer and end to the global pandemic. The economic fallout will be severe. Use tight stops on all positions. Look for bargains, but do not get married to any risk positions.

    Best bets for Q2 2020- Commodities

    As we move into Q2 2020, markets are likely to remain challenging.

    My best bets for Q2 are:

    • The stock market should continue to be highly volatile. I would look to buy high-quality stocks with secure balance sheets and lots of cash that can weather the bearish storm. It is not a time to speculate on companies that may not make it as the weak tend to get weaker. The VIX should remain at an elevated level. Buying VIX-related products with tight stops is likely to continue to be the optimal approach to trading the volatility index.
    • I expect lots of volatility in the dollar and all currency markets in Q2. Wide swings are likely to be the norm rather than the exception.
    • Time will tell if digital currencies attract interest, but there will be many changes in the aftermath of COVID-19, and technology will play a far greater role in our daily lives. I would be a buyer of Bitcoin and other digital currencies on weakness with very tight stops. I would only trade them on the long side of the market.
    • The Brazilian real remains in a downtrend, and if Coronavirus takes a significant toll on the most populous nation in South America, we could see lower levels. However, Brazil is a commodity-rich country that would benefit from any bounces in the raw material markets. I’d only be long Brazilian real with a tight stop.

     

    • The Canadian dollar is likely to move higher and lower with the price of crude oil and agricultural commodities and could act as a proxy for those sectors. So long as the virus does not take a significant toll on Canada, I expect the C$ to exhibit strength in Q2.
    • I am bullish on gold, given the unprecedented amount of stimulus. I would approach mining stocks with caution, given the potential for mine closures during the global pandemic. The risk of long positions in gold will rise with the price.

     

    • Silver fell to what could turn out to be an unsustainable price in Q1 at below $12 per ounce. At the $14.50 level, I favor buying physical silver with tight stops and buying again at lower levels if stopped out. If gold is going to above the $2000 level, silver should attract buying.
    • I continue to favor platinum on the long side, but it has been a highly frustrating trade. I prefer physical bars and coins to the PPLT and PLTM ETFs in this environment. While the premium for bars and coins is high, buying one contract of NYMEX futures and taking delivery is one approach to avoid some of the added costs. Each contract is for 50 ounces. At $725 the contract value is $36,250.
    • Economic contraction around the world is likely to weigh on the price of copper. I would use very tight stops on any long or short positions in Q2.
    • All of the base metals should follow copper. I would approach any of the nonferrous metals with caution and tight stops. Shares of BHP, RIO, GLNCY, FCX, SCCO, and the other base metal producing companies could experience lots of volatility. Approach these companies with a plan for risk-reward, with emphasis on keeping risks as low as possible.
    • Grain markets feed the world. We are entering the season of uncertainty during the planting and growing seasons for the 2020 crop. The weather conditions will determine the path the prices, but people need to eat. The grains are my favorite sector going into Q2, but I look to buy on price weakness will use tight stops on long positions.
    • The KCBT-CBOT wheat spread continues to be at a divergent level with a significant premium for CBOT wheat futures. I favor an eventual mean revision in the spread as the long-term average is a 20-30 cents premium for CBOT over KCBT wheat.
    • I expect a continuation of wide price variance in the oil sector. Crude oil and natural gas are a matter of national security for the US and Europe. I would only dip a toe on the long side of shares of companies that are the best-in-breed like Exxon Mobile, (XOM), British Petroleum (BP), and Royal Dutch Shell (RDS-B) as they are likely to have government backing during this challenging period. When it comes to the prices of oil and gas, I will trade from the long and short sides of the market with tight stops on all risk positions.
    • The gasoline and heating oil crack spreads declined dramatically on demand destruction. Rather than trading shares of companies involved in refining, I prefer the processing spreads going into the second quarter but would use tight stops.
    • Natural gas reached a 25-year low in March at a time of the year when the energy commodity tends to reach a seasonal low. However, in the current environment, any long positions require very tight stops. I would avoid the shares of any natural gas producing companies in this environment.
    • Coffee recovered from 2019 lows. I will be less aggressive on the long side in Q2 but will keep a small core long position. Sugar has declined to the 10 cents per pound level. The path of the sweet commodity will depend on the Brazilian real and crude oil as it is the primary ingredient in ethanol in the South American nation. Cocoa is back in the buy zone at the $2250 per ton level, but a tight stop on long positions is a wise approach. Cotton at 50 cents is historically cheap, but demand destruction could cause marginal new lows.
    • Cattle and hog prices are at the lowest level in years. Buying on price weakness could be the optimal approach over the coming days and weeks as the 2020 grilling season begins in late May. I would use tight stops and look to rebuy at lower levels if the market stops out positions. Like in the grains, people require animal proteins.
    • Lumber has declined to a level where the potential for a rebound over the coming months is rising. However, the longer the virus spreads, the less demand for wood. Meanwhile, if part of the US stimulus includes an infrastructure building package, it could lift the price of lumber and other industrial commodities.
    • The deflationary spiral has weighed on the prices of all commodities, and that looks likely to continue into Q2. As prices fall, so will production. Inventories will eventually begin to decline, and prices will find bottoms. It is impossible to point to lows in the current environment. However, trading small positions from the long side during price weakness with tight stops and replacing them when stopped at lower levels could lead to catching updrafts when they occur.

    The 2020 election in the US will serve as a referendum on tax, energy, and other policies that have lifted the stock market in the US. While I had expected the most contentious contest in history, Coronavirus has changed everything in the US and around the globe. We are all facing the most challenging time of our lives. Stay safe, keep some cash available for necessities, and trade the markets that are essentials as they have the best chance of holding value. I continue to favor gold as the unprecedented levels of liquidity will weigh on the value of fiat currencies. Grains and other commodities that feed the world should be less sensitive to deflationary pressures. The economic price tag for the pandemic will be enormous. There are likely to be profound policy changes in its aftermath. Q1 was a time to forget. Hopefully, Q2 will find more stability and rise from the ashes of the worst period for global health and wellbeing since 1918.

    The Invesco DB Commodity Tracking ETF product holds a diversified basket of raw material futures, but it is weighted towards energy products. The fund summary for DBC states:

    The investment seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Diversified Commodity Index Excess Return™. The fund pursues its investment objective by investing in a portfolio of exchange-traded futures on Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar. The index is composed of notional amounts of each of these commodities.

    The most recent top holdings of DBC include:

    Source: Yahoo Finance

    DBC has $779.2 million in net assets, which dropped significantly from the end of Q4. The product trades an average of 1,870,671 shares each day, which is 11,338 shares lower than at the end of Q4. In 2019, net assets dropped by $680 million.

    Source: Barchart

    As the chart shows, DBC moved from $15.95 at the end of Q4 2019 to $11.25 per share at the end of Q1, a decline of 29.47% for the quarter. DBC underperformed the asset class in Q1 as the composite of 29 commodities fell by 17.77% because of its weighting to the energy sector.

    Expect a continuation of volatility in markets in Q2 as the world continues to battle Coronavirus. Discipline, a logical risk-reward approach using stops, and flexibility are critical elements for success in the world of commodities. Stay safe and healthy.

    The spreadsheet on commodities prices:

    Q1-2020 Quarterly Spreadsheet for the Hecht Commodity Report(AutoRecovered)

    Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.

     

 

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