- Four of five sectors post gains in Q2- Double-digit percentage increases in three of six sectors.
- Energy is the biggest winner with an over 55% gain
- Double-digit percentage gains in the base and precious metals
- Animal proteins is the only losing sector
- Gasoline is the winner on the upside- Coffee is the leading loser for the quarter
The raw material markets made a comeback in the second quarter of 2020 after the global pandemic caused a deflationary spiral taking the prices of most assets lower in Q1. The commodity asset class consisting of 29 of the primary commodities that trade on US and UK exchanges moved 17.77% lower in Q1 than the level at the end of the year that ended on December 31, 2019. In Q2, it recovered by 13.75% and was 10.63% lower over the first six months of this year. In 2019, 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 gasoline that posted a gain of 102.72% in Q2 with NYMEX crude oil in second place with a 91.75% gain. The biggest loser for the quarter was the ICE coffee market that fell 15.93% with Palladium in second place on the downside with a 14.66% loss in Q2. The price of nearby CBOT wheat futures fell 13.85% over the period. In a sign of the recovery in the commodities sector, the Baltic Dry Index moved 227.37% higher in Q2. Over the first six months of this year, frozen concentrated orange juice futures led the way on the upside with a.30.97% gain, followed by gold with was up 18.21% at the end of June. The biggest loser on the year was heating oil futures, down 37.46% over the six months, and lean hogs with a 36.75% loss. NYMEX crude oil was a close third with a 35.69% loss since the end of 2019. The biggest loser during one quarter often turns out to be a leader on the upside during the next quarter.
There were nineteen double-digit percentage gainers in Q2 with a total of six over the first six months of this year. Seven commodities posted double-digit percentage losses in Q2, which reflects the high level of volatility in markets. Winners outnumbered losers in the second quarter that ended on June 2020, by a margin of over two to one. Over the first half of this year, only ten commodities that have posted gains compared to twenty-nine products with prices below the level at the end of December 2019.
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 1.76% loss in Q2 but was still 1.35% higher for the year. 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 fell in Q2 as the interest rate differential between the dollar and the euro narrowed dramatically.
The Fed pushed the Fed Funds rate to 2.25-2.50% at the end of 2018. 2019 was a year of reversal for the US central bank. At their June 2019 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 that the global pandemic would cause a deflationary spiral. The March 3, 2020, 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 more substantial than ever in the US and Europe as central banks seek to stabilize markets until scientists can develop 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 Fed continued to signal that interest rates would not rise anytime soon in Q2.
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 first quarter, markets had declined as the number of cases and fatalities worldwide continued to rise. In Q2, after the virus took a significant toll on Europe and the East Coast of the US in Q1, businesses began to reopen. At the end of Q2, the number of cases declined in New York and other areas struck by the pandemic but continued to rise in other areas, including Florida, Texas, California, and Arizona, as well as other states in the US. The United States has a higher number of cases and led the world in the death toll, with Brazil second as of June 30.
Stocks plunged in the first quarter as the prospects for corporate earnings evaporated. In the second quarter, they come storming back on the upside. The DJIA fell by 5.63% in 2018 and posted a gain of 28.88% in 2019. In Q1, the DIJA lost 23.20%, but it was 17.77% higher in Q2, narrowing the loss to 9.55% over the first six months of 2020. 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, but it rose an incredible 30.63% in Q2 and was 12.11% higher than at the end of last year at the end of June. The technology sector survived and thrived during the global pandemic as the NASDAQ rose to a new record higher above the 10,000 level. 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. At the end of Q2, the rise in stocks pushed the VIX to 30.43, 23.11 lower for the second quarter. As we head into Q3, 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. Interest rates have declined to lows, which lowers the cost of carrying inventories. In Q2, the US Treasury borrowed $3 trillion to fund the stimulus, which was far higher than the previous record from June through September 2008 when they borrowed $530 billion. The monetary and fiscal stimulus in the US and worldwide weighs on the value of fiat currencies, which could lead to inflation in the coming years. The risk-off behavior in commodities in 2008 and central bank and government actions to address the crisis twelve years ago, led to a booming rally in commodities that took prices to multiyear and, in some cases, all-time highs, in 2011 and 2012. A repeat performance over the coming months and years could have an explosive impact on raw materials markets.
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 in Q2. The price of NYMEX crude oil fell below zero for the first time on April 20. Brent futures fell to the lowest price of this century at $16 per barrel. As storage for the energy commodity filled to capacity, the NYMEX landlocked crude oil became a bearish hot potato as the May futures contract moved into the delivery period. Russia, Saudi Arabia, and other world producers cut output by a record 9.7 million barrels per day in April. They extended the two-month cut to the end of July in June. Low prices caused US output to decline from a record 13.1 million barrels per day in March to 11 million at the end of June. The attempt to balance supply and demand in the oil market caused the price of nearby WTI and Brent futures to recover to the $40 per barrel level by the end of Q2.
Energy was the best-performing sector in Q2 as the commodities that power the world rose by 55.73%. Base metals posted a 12.88% gain as copper prices moved over 20% higher for the quarter. Precious metals were just over 11.5% higher, led by silver and gold. The yellow metal continued to power higher and was flirting with the $1800 per ounce level at the end of June. Soft commodities were 4.24% higher on the quarter with cotton and sugar leading the way on the upside during the three months. 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. By the end of the quarter, the real bounced higher as the dollar softened against world currencies. Emerging markets were victims of the impact of the virus on world markets. Argentina defaulted on debt obligations in Q2. Grains rounded out the winners with a 2.97% gain led by nearby oats and rice futures. Five of the six sectors posted gains in Q2, but animal proteins did not join the bullish party. The sector that includes cattle and hog futures fell 4.83% as bottlenecks at processing plants pushed prices for producers to lows during the start of the peak grilling season in the US. Meanwhile, consumers did not enjoy the lowest prices in years, as supply chain problems because of coronavirus infections at manufacturing plants around the US caused supply shortages and higher retail prices at supermarket butcher counters.
The geopolitical landscape continued to take a back seat 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. However, the relationship between the US and China deteriorated during Q2 as the virus started in Wuhan Province, China, and the Chinese government did not protect the rest of the world. While China banned domestic travel during the early days of the virus, they allowed foreign journeys, which spread the coronavirus to Europe, the US, and the rest of the world.
Political divisiveness accelerated in the US as the nation heads into the Presidential election in November. Former Vice President Joe Biden will face President Trump in the contest, but the election will be a lot different than in the past given social distancing guidelines. At the end of Q2, political polls pointed to a commanding lead for the challenger, but Hillary Clinton led President Trump by a similar margin in 2016 with months to go before the election. Meanwhile, civil discord in the US after a tragic case of police brutality in Q2 was at the highest level since the late 1960s. Political division is likely to cause increased volatility in markets across all asset classes. Coronavirus is another factor that will contribute to price variance over the coming months.
Natural gas fell to the lowest level in twenty-five years in June at $1.432 per MMBtu on the back of high levels of inventories. Natural gas tends to make annual lows in the early spring, but 2020 is far from an ordinary year. Gasoline futures tend to hit lows during winter months and higher in the late spring and early summer. Gasoline was the leader on the upside in Q2. 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 summer is the growing season for grains in the US. So far, crop progress indicates that 2020 will be another year of ample crops. Trade issues between the US and China, together with coronavirus in the US, are creating dislocations in agricultural markets. The end of summer is the heart of the 2020 grilling season when animal protein consumption tends to rise. Meat prices fell to the lowest levels in years during Q2 because of supply chain issues. As we head into the third quarter, 2020 is anything but a typical year in all markets, and the spread of Coronavirus is a primary issue that will influence prices over the coming months. The economic fallout from the pandemic will affect prices in the years ahead. Moreover, the 2020 election in the US will determine the future of domestic and international policy, which could add to market volatility until November and beyond.
A myriad of complex factors on a macro and microeconomic basis dictate the price direction for the commodities market over the coming three months and beyond. The pandemic continues to be the most significant factor facing markets across all asset classes. That will continue for quite some time, perhaps years as the economic fallout could be the most significant in history.
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 Q2
During the period from April through June 2020, all of the commodity sectors except animal proteins posted gains. Twenty-seven products posted gains with nineteen double-digit percentage increases. The list of gains are as follows:
Over the first half of 2020, the following ten commodities posted gains:
Losers in Q2
Only twelve commodities posted losses in the second quarter of 2020 as the market experienced a rebound from the price carnage in Q1:
While winners outnumbered losers in Q2, the year-to-date performance continued to display losses in 29 of 39 products:
The CFTC has defined digital currencies as commodities. The cryptocurrency asset class that was all the rage in 2017 plunged in 2018. In 2019, the digital currencies made a comeback, but the risk-off conditions weighed on many of the members of the asset class in Q1. In Q2, they made a comeback. The market cap of the asset class as a whole moved from $181.094 billion at the end of Q1 2019 to $259.705 billion on June 30, up 43.41% for the three-months and 35.31% higher over the first six months of 2020. Bitcoin rose 41.84% in Q2 and was 26.41% higher so far in 2020. Ethereum posted a 68.67% gain in Q2 and 72.85% higher so far this year. Litecoin was 6.16 higher for the period but was still 0.91% lower since the end of 2019. Bitcoin Cash was 0.72% higher in the second quarter and 7.48% higher over the six months. The number of tokens rose from 5,285 at the end of Q1 to 5,688 on June 30, a rise of 7.63%. The market cap of the digital currency asset class reached a peak of over $800 billion in late 2017. The rising number of tokens has diluted the asset class over the past two and one-half years. Bitcoin, the leader of the pack almost kept pace with the market cap in Q2 but underperformed over the first half of the year.
Issues to look forward to in Q3 2020
Optimism is the most significant factor for people to remember as we head into the third quarter of 2020. Scientists are working furiously on treatments and a vaccine that will remove the dangerous threat of coronavirus infections.
The economic costs of the global pandemic will be staggering, which will influence markets over the coming months and years. When it comes to commodities, lower prices so far in 2020 are leading 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 7.66 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. Many markets made comebacks in Q2, which could become a launchpad for the future. If the price action after 2008 repeats, we could see a bull market in the raw materials asset class in the coming months and years.
The US election will take the center of the stage alongside the coronavirus during the second half of 2020. During Q3, the contentious exchanges between Democrats and Republicans are likely to rise. Simultaneously, the civil discord in the US will make the election period the most turbulent since 1968.
I expect price variance in markets across all asset classes to remain at very high levels throughout Q3 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. Follow the trends in markets and try to ignore the news cycle. If we learned anything in 2020, markets often divorce from new items and trends are a better indicator of market direction than reactions to the daily ups and downs of the news cycle.
Most importantly, stay safe and take care of the vulnerable. Believe in science, as it will eventually come up with the solution. As we head into Q3, the number of cases is rising again, but healthcare professionals have learned a lot over the past months. Remain cautious, but optimism will help us all get through the most challenging period for the world of our lifetimes.
History- Results from my best bets for Q2
The results of my best bets for Q2 from my Q1-2020 report are as follows:
- 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.
Stocks made an amazing comeback in Q2, and high-quality companies did very well. The technology sector outperformed other areas of the market, but almost all share prices rebounded. The VIX and VIX-related products were trading sardines, offering opportunities for nimble traders to buy on dips and take profits on rallies on a short-term basis over the past three months.
- 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.
The dollar index rose to its highest level since 2002 at the end of Q1 and moved steadily lower throughout Q2. The differential between the dollar and euro interest rates narrowed, which caused selling in the US currency. The dollar index ended Q2 after a series of lower highs and lower lows.
- 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.
Bitcoin and most of the members of the digital currency asset class moved appreciably higher during Q2. Buying dips was the optimal approach to the cryptocurrencies.
- 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 Brazilian real fell to a new low of $0.1673 in mid-May but recovered to the $0.1830 level at the end of Q2. Buying scale-down was the optimal approach to the Brazilian currency in Q2.
- The Canadian dollar is likely to move higher and lower with the price of crude oil and agricultural commodities and could act as a proxy for those sectors. So long as the virus does not take a significant toll on Canada, I expect the C$ to exhibit strength in Q2.
The Canadian dollar moved 3.62% higher in Q2 as the price of crude oil recovered from negative territory on April 20 to the $40 per barrel level at the end of June.
- 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.
Gold moved 13.71% higher in Q2 and reached the $1800 per ounce level at the end of June for the first time since 2011. Mining stocks also moved appreciably higher in Q2. Buying gold on price weakness was the optimal approach to the precious metal.
- 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.
Silver moved almost 31% higher in Q2 as the low at below $12 in March was a blow-off low. Buying dips in silver was the best approach to the market as it rose over the $18.50 per ounce level at the end of June.
- 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.
Platinum recovered by 16.05% in Q2 and traded at a high of just over $930 per ounce in May. Buying platinum on price weakness was a profitable strategy during the second quarter.
- 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.
As optimism returned to the markets in Q2, copper posted an over 20% gain on both the LME and COMEX. Copper leads the base metals sector higher. The trend in copper was higher since the start of Q2, which led to an almost V-shaped recovery in the red metal. Buying at any level in Q2 yielded profits in the copper market.
- 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.
All of the base metals followed copper higher in Q2, but copper put in the best performance in the upside. BHP, RIO, GLNCY, FCX, SCCO, and other base metals producing companies all moved appreciably higher during the second quarter.
- 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.
Grains moved a bit higher, but the performance of the three leaders, soybeans, corn, and wheat, was disappointing. Buying scale-down during the quarter led to profits at the end of Q2 as the grain markets rallied during the final days of June.
- 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 spread moved from a 75.75 cents discount for KCBT wheat at the end of Q1 to a 56.50 cents discount at the end of Q2. While the spread remains at a divergent level, it improved as KCBT was down less than CBOT wheat in Q2.
- 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.
Crude oil was a wild ride in April as the price of NYMEX futures fell into negative territory for the first time. Trend following in the oil market was the optimal strategy as the price rallied to the $40 per barrel level at the end of Q2. XOM rose during Q2, but BP and RDS-B were steady to lower. While there were no significant losses in the shares, they did not follow the price of crude oil as it rallied to the $40 per barrel level.
- 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.
Gasoline crack spreads exploded 159.26% higher in Q2, but the distillate cracks declined by 50.72% over the three months. A portfolio of the refining spreads was a profitable risk position in Q2.
- 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.
Natural gas recovered to a high of $2.162 per MMBtu in early May, but it fell to a new low of $1.432 in late June. Trading in natural gas in Q2 was profitable for those who took profits on a scale-up basis. Buying in late June when the price sunk to a new twenty-five year low was profitable as the price recovered by the end of the second quarter.
- 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.
Soft commodities advice yielded mixed returns in Q2. Coffee fell by over 15%, but sugar rose by over 14%. Cocoa was weak and fell below the $2200 per ton level. Cotton was a bright spot as the price rose from 50 to over 60 cents per pound.
- 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.
Tight stops were necessary in animal proteins as live cattle, and lean hog prices slumped. The bottlenecks at processing plants weighed on futures prices. Meanwhile, both pork and beef prices closed Q2 significantly higher than April lows. Buying scale-down yielded profits in the meat futures markets.
- 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.
Lumber was a star performer in Q2 with a 56.45% gain over the three months. Most lumber-related risk positions at the end of March were profitable.
- The deflationary spiral has weighed on the prices of all commodities, and that looks likely to continue into Q2.
The deflationary spiral reached a peak in late April when nearby NYMEX crude oil futures fell to a negative price. After the April low, the prices of many commodities rallied as the market recovered from the deflationary spiral.
- 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.
Long positions in most commodities, and stocks, were profitable in Q2 as markets experienced significant recoveries.
Many assets made a comeback in Q2, and commodities were no exception as the asset class posted a double-digit percentage gain for the quarter. Gold continued its ascent in Q2. As we head into Q3, continue to 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. At the same time, prepare for lots of price variance as the US election kicks into high gear. While the polls are pointing to a victory by Democrats, polls were wrong in 2016, and they are likely to tighten as the election approaches. 2020 is no ordinary year, and the second half could bring more than a few surprises.
Best bets for Q3 2020- Commodities
As we move into Q3 2020, markets are likely to remain challenging.
My best bets for Q3 are:
- At the end of the second quarter, the trend in the stock market was higher. The many issues facing markets could cause significant risk-off conditions to return in the blink of an eye. Look to buy high-quality companies during periods of price weakness. The VIX could experience periods where it suddenly moves higher. Buying VIX-related products with tight stops is likely to continue to be the optimal approach to trading the volatility index.
- The trend in the US dollar was lower at the end of Q2. The narrowing of the yield differential between the dollar and the euro could keep pressure on the index into Q3.
- The declining confidence in central banks and governments worldwide is likely to provide support for Bitcoin and other digital currencies. I suggest buying on dips and holding long core positions in Bitcoin, Ethereum, EOS, Litecoin, and other members of the burgeoning asset class.
- Brazil is suffering from the second-leading number of coronavirus cases and fatalities. However, Brazil has vast natural resources that could lift the value of the currency in the coming months and years if commodity prices move to the upside. I view the real as a proxy for commodities and am bullish for the coming years. I would only buy the Brazilian currency during periods of weakness against the US dollar.
- The Canadian and Australian dollars are also commodities currencies. I favor the upside in the two foreign exchange instruments against the dollar but would only buy during dips.
- I remain bullish on the gold market. The next target on the upside is the 2011 high at $1920.70 per ounce. The risk of a long position will rise with the price of the yellow metal. Buying during corrections is likely to continue to yield optimal results.
- Silver can be a wild ride when it comes to price volatility. I favor the long side in the silver market. The first target on the upside is the 2016 high at just over $21 per ounce. Above there, silver could run much higher in the coming months and years.
- Platinum has been a dog, but I remain a canine lover. I would buy platinum on price dips using either the futures, physical, or ETF markets.
- Copper enters Q3 in a firmly bullish trend. $3 is the target on the upside. If the price action following the 2008 global financial crisis is a guide, copper could pick up upside steam if inflationary pressures emerge.
- I continue to favor the shares of BHP, RIO, GLNCY, FCX, SCCO, VALE, and the base metals producers. Approach these companies with a plan for risk-reward. The PICK ETF product holds a portfolio of shares in the leading base metal producing companies.
- Grain markets feed the world. We are coming to the end of the growing season in the US, and the 2020 crop looks to be sufficient to meet global requirements. From a fundamental basis, I continue to favor the long side of the grain markets, but trade issues and high inventory levels could cap the upside in the corn, soybean, and wheat markets. I would look to take profits on long positions on any rallies over the coming weeks.
- 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 would hold existing positions at over the 50 cents premium for the KCBT wheat level.
- Crude oil is likely to remain volatile over the coming months. I favor the upside but would only take risk positions with tight stops. I also favor the best-in-breed like Exxon Mobile, (XOM), British Petroleum (BP), and Royal Dutch Shell (RDS-B) as they could be positioned to pick up assets at bargain-basement prices as the industry consolidates. 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 favoring long exposure.
- The gasoline and heating oil crack spreads remain at low levels. I favor leading refining companies like Valero (VLO). I would look to buy crack spreads on price weakness.
- Natural gas remains cheap at below $2 per MMBtu. I am looking for a recovery that tests the early May high at $2.162 per MMBtu. As the 2020/2021 winter season approaches in the fall, the high level of inventories should cap any rallies. However, we should see the price drift higher as the withdrawal season approaches. I believe we have seen the low for 2020 at $1.432 per MMBtu.
- Coffee is in the buy zone at $1 per pound or lower. Sugar is likely to follow the Brazilian real and oil price over the coming quarter. Cocoa is in the buy zone below the $2200 per ton level, but a tight stop on long positions is a wise approach. Cotton at 61 cents recovered, and the path of the price will depend on this year’s crop and trade between the US and China. I continue to favor the upside but would use a very tight stop on long positions. Cotton inventories are high, which could cap the upside over the coming months.
- Cattle and hog prices are at the lowest level in years. I am bullish for the long-term, but the 2020 grilling season will end in early September. I would look to buy beef and pork futures on price weakness but would use stops and re-enter at lower levels if the market triggers stops on the downside.
- Lumber has moved a lot higher over the past three months. The price of wood will reflect the US housing market and the potential for an infrastructure program in the US. The price of lumber moved to the upside by 50% in Q2. The risk of long positions rises with the price of lumber.
- The Fed has installed a giant put option under US bonds and debt securities. I would be a buyer of bonds on any price weakness and a seller during risk-off periods that cause the prices to rally.
- Expect the unexpected in Q3. Follow trends and ignore the news cycle. The market will tell you the correct risk position. Approach markets with a plan for risk and reward and stick to that plan. Never risk more than your profit horizon. When you get aboard a profitable trend, use trailing stops to optimize profits. Markets are entering Q3 with optimism, but it is likely to be a bumpy road over the second half of 2020.
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. I expect the most contentious contest in history. Coronavirus has changed everything in the US and around the globe. We face the most challenging time of our lives as we enter the second half of this year. 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, but we are moving towards the offseason when it comes to weather events that could send prices significantly higher. The economic price tag for the pandemic will be enormous. If 2020 turns out to be anything like 2008, we could see a wild ride to the upside in the commodities asset class. I am a buyer of most commodity products on price weakness, given the unprecedented level of the monetary and fiscal stimulus flooding the global financial system.
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 $851.27 million in net assets, which moved higher from the end of Q1. The product trades an average of 1,081,759 shares each day, which is significantly lower than at the end of Q1.
As the chart shows, DBC moved from $11.25 at the end of Q1 to $12.31 per share at the end of Q2, a rise of 9.42% for the quarter. DBC underperformed the asset class in Q2 as the composite of 29 commodities rose by 13.75%.
Expect a continuation of volatility in markets in Q3 as the world continues to battle Coronavirus and faces the Us election. 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:
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.