- Five sectors gain, and one posts a loss in Q4.
- Soft commodities are the leader in Q4, but precious metals post the most significant gain in 2019
- Grains, meats, precious metals, and energy move higher in Q4, but base metals post a loss over the period
- Coffee was the best-performing commodity in Q4, but palladium posts the highest percentage gain in 2019
- A review of Q4 and best bets for Q1 2020 and beyond in commodities.
The raw material markets posted a marginal gain in the final quarter of 2019 as the dollar index moved lower, and a de-escalation of the trade war between the US and China supported commodity prices. The commodity asset class consisting of 29 of the primary commodities that trade on U.S and U.K. exchanges moved 6.49% higher in Q4 and were 10.98% higher for the year that ended on December 31. 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 fourth quarter was coffee that posted a gain of 28.23% for the three-months with live cattle futures in second place with a 19.24% gain. The biggest loser for the quarter was the Baltic Dry Index that fell 41.30% with nickel in second place on the downside with a 18.97% loss in Q4.
In 2019, the commodity that was the best performer was palladium with a better than 59% gain, and NYMEX crude oil, which was 34.46% higher than its closing price at the end of 2018. Iron ore gained 32.27% since the end of last year. Nickel was 31.79% highs, and rice was up by 30.11%. Natural gas was the worst-performing commodities since the end of last year, with a 25.54% loss with FCOJ a close second losing 22.33%.
There were twelve double-digit percentage gainers in Q4, and four double-digit percentage losers during the final three months of 2019. Winners outnumbered decliners in the quarter that ended on December 31, 2019, and the same holds on an annual basis.
The U.S. dollar is always 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 2.99% loss and was only 0.34% higher in 2019 after moving 4.26% higher in 2018, which followed a 10.23% decline in 2017. The dollar fell in Q4 after the Fed cut interest rates by 75 basis points since July 31, and the UK election paved the way for a Brexit with an agreement in early 2020.
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.
The weak Chinese economy because of the trade dispute with the US had been a problem for many commodities prices as China is the world’s leading consumer of raw materials. The trade war escalated in early August when the US slapped new tariffs on the Chinese, and China retaliated. The de-escalation in the wake of the “phase one” trade deal in December returned optimism to raw material markets.
Stocks added to gains in the fourth quarter as the prospects for lower rates support equity prices and sent the stock market to record highs. The DJIA fell by 5.63% in 2018 but posted an 11.15% gain in Q1. In Q2, the DJIA was 2.59% higher. In Q3, it was 1.19% higher. In Q4, an increase of 6.02% sent the bellwether DJIA 22.34% to the upside in 2019. The S&P 500 moved 6.24% lower in 2018 and moved 13.07% higher in Q1. In Q2, it gained 3.79%. In Q3, it gained 1.19%. In Q4, it posted an 8.53% gain and was 28.88% higher for the year. The tech-heavy NASDAQ fell 3.88% in 2018, but it turned around and posted a 16.64% gain over the first three months of 2019. In Q2, it moved another 3.45% higher. In Q3, it suffered a marginal 0.09% loss. In Q4, the NASDAQ moved 12.17% higher and was 35.23% higher in 2019 as of the close of business on December 31. The VIX index, which hovered around 10 in 2017, closed Q4 2018 at 25.42. On March 29, the VIX finished at 13.71 down 11.71 as stocks took the elevator down in Q4 2018 and the stairs higher over the first three months of this year. In Q2, the VIX settled at 15.08, up 1.37 on a quarter-to-quarter basis on the back of trade issues and the rising tensions between the US and Iran. At the end of Q3, the VIX was at 16.24, 1.16 higher compared to the closing price at the end of Q2. In Q4, the volatility index was at 13.78, down 2.46 for the quarter, and 11.64 for the year. As we head into 2020, the danger of periodic spikes in volatility continues to lurk in the background. Commodities are on the front lines when it comes to trade disputes. The progress of trade talks between the leaders of the US and China will influence the prices of markets across all asset classes during the initial trading sessions in 2020. Trade, Iran, and the US election will likely dominate the news cycle in 2020. Lower global interest rates continue to provide support for stocks and commodities as we head into the new decade.
Soft commodities were the most bullish sector in Q4 as the potential for a deficit in the coffee market lifted the price of the futures by over 28%. Base metals were a marginal loser during a bullish period for commodities prices. The Brazilian real remained near multiyear lows, but supply concerns lifted the prices of both sugar and coffee in the final quarter of the year. Precious metals and energy prices moved higher in Q4, along with grains and meats. All six sectors of the commodities asset class posted gains in 2019 on a year-on-year basis.
On the geopolitical front, there are many areas of turmoil around the world. Aside from trade, the standoff between the US and Iran in the Middle East had resulted in several incidents, including attacks on tankers, missiles landing on Saudi sovereign territory, and the downing of the US drone near the Strait of Hormuz. In mid-September, the attack on Saudi oil fields increases tensions in the regions. While Q4 was mostly a quiet period in the Middle East, 2020 could be a different story. In December, North Korea stepped up its rhetoric towards the US with threats of missile tests. At the very start of 2020, the US airstrike that killed a high-ranking Iranian general ramped up tensions in the Middle East.
Political divisiveness in the U.S. continues to separate many along partisan lines. The 2020 Presidential election is now in high gear with primaries starting in February. The Democrats have shifted to the left with many candidates embracing a progressive agenda and “Democratic Socialism.” The leader in the polls at the end of 2019 on the Democrat side was former Vice President Joe Biden. Still, Senators Bernie Sanders and Elizabeth Warren together represent a voting block that could pose a threat to Biden’s nomination. Former NYC mayor Michael Bloomberg threw his hat into the ring in Q4 with a plan to concentrate his efforts on super Tuesday primaries in early March. However, no candidate was running away with the nomination from the opposition party at the end of 2019. Primaries and caucuses in Q1 2020 should clear the field a bit, but the odds of a brokered convention are rising.
The election between the eventual nominee and President Trump could be even more contentious than the 2016 contest. On December 18, the House of Representatives impeached the President under two articles. A trial in the Senate will take place in January. The Speaker of the House had not sent the articles of impeachment to the Senate as of the end of 2019. The Republican-controlled Senate looked set to acquit the President as not one Republican voted in favor of the articles of impeachment in the House of Representatives in December. President Trump will go into his re-election campaign with the stain of impeachment on his record. However, the strong US economy and successes on the trade front with the “phase one” deal with China and passage of USMCA that replaces NAFTA are victories and fulfillment of campaign pledges made in 2016 he can point to on the campaign trail. The impeachment appears to have strengthened the conviction of the President’s political base going into the election.
In Q4, UK Prime Minister Boris Johnson, the former Mayor of London and ex-Foreign Secretary under Prime Minister May won an impressive victory in the December 12 election paving the way for Brexit by the end of January. The victory was the second referendum in favor of Brexit, which removed some uncertainty from markets.
Aside from politics and economics, which continue to be a cocktail of volatility for all markets, the first quarter of 2020 is a time of the year when the markets begin to look past the winter season. The withdrawal season in the natural gas market will end in March, and stockpiles will begin to rise after the most bearish price action in December since 2015. The odds of a test of the $2 per MMBtu level in the spring are high as we move into the New Year. Gasoline consumption will increase as the spring approaches. Agricultural markets will begin to shift focus from the weather in South America to the planting season for the 2020 crop in the US and the northern hemisphere, which starts in late March. The population continues to grow at a rate of around 20 million per quarter, which continues to put pressure on the demand side of the fundamental equation for the agricultural commodities that feed the world.
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 during the new decade. The US election in 2020 could cause volatility in markets to intensify throughout the year.
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 Q4
During the period from October through December 2019, we saw more gains than losses that resulted in a move to the upside in the asset class. Five of the six primary sectors of the commodities asset class posted gains in Q4. The top three performing commodities for Q4 were coffee, which appreciated by 28.23%, live cattle futures, which were up 19.24%, and soybean oil, which posted an 18.97% gain compared to its price at the end of Q3. Other double-digit percentage gainers in Q4 included KCBT wheat, up 17.11%, palladium, which was 15.95% higher, cotton up 15.56%, NYMEX crude oil, which moved 12.93% to the upside, and CBOT wheat up 12.71%. Sugar got 12.58% sweeter, Brent crude oil futures rose 11.38%, lumber was up 10.41%, and platinum gained 10.39%.
In Q4, soft commodities led the asset class with a 11.57% gain, followed by animal proteins that were 10.14% higher since the end of September 2019. Precious metals were up 8.92%, grains gained 6.39%, and energy moved 3.38% higher.
Commodities that moved between 5% and 10% to the upside include rice which gained 9.32%, lean hogs, which was 9.13% higher, COMEX copper that moved 8.47% higher, and gasoline added 7.92% over the third quarter. Over the same period, LME copper was 7.35% higher, heating oil futures rallied 6.62%, LME aluminum was up 6.24%, while oats posted a 5.87% gain. The price of silver moved 5.43% higher in Q4.
The commodities that were 3% to 5% higher were LME tin with a 4.85% gain; soybeans up 4.08%, ICE cocoa that moved 4.01% higher, and gold up 3.92%. MGE wheat gained 3.03%.
Marginal increases of 0-3% occurred in feeder cattle futures that was 2.05% higher, and soybean meal up 1.35%.
In 2019, the precious metals sector led the asset class with a 28.93% gain. Energy commodities were 15.11% higher, with grains 11.50% higher, meats up 5.15%, and soft commodities 3.47% above where they closed at the end of 2018. Base metals gained 1.74% in 2019.
Losers in Q4
The only losing sector in Q4 was base metals as it declined by 1.56% over the three-months, led by an almost 19% loss in nickel forwards.
The three worst-performing commodities of Q4 were nickel, which was down by 18.97%, ethanol futures that dropped 12.53%, and LME lead that declined 7.50%. Nickel and ethanol were the only two commodities that suffered double-digit percentage losses for the quarter. Honorable mention goes to the Baltic Dry Index, which corrected by 41.30% in Q4 as seasonal factors caused the demand for shipping to decline, weighing on freight rates.
The only other commodity that lost 5% to 10% was natural gas, which lost 6.05%. FCOJ suffered a 2.55% loss, with LME zinc declining 1.36%. Iron ore was 0.77% lower, and corn edged only 0.06% to the downside over the final three months of 2019.
The leading losers in 2019 were natural gas, which declined 25.54% since the end of 2018, FCOJ down 22.33%, and LME tin, which lost 13.26% for the year that ended on December 31.
Gasoline and heating oil processing spreads reflected seasonal factors in Q4. Gasoline cracks moved 14.30% lower while heating oil cracks which are a proxy for distillate products, posted a lower 6.60% loss at the end of the fourth quarter compared to their closing prices at the end of Q3 2019.
Not one of the six sectors posted a loss in 2019 as commodities posted an almost 11% gain on the year as an asset class.
The CFTC has defined digital currencies as commodities. The cryptocurrency asset class that was all the rage in 2017 plunged in 2018. In Q1, the asset class moved to the upside but did little to erase losses from last year. In Q2, prices exploded higher. In Q3, prices went the other way as all of the digital currencies moved significantly lower. In Q4, the losses continued. Bitcoin lost 12.79% in Q4 and was trading at the $7,226.77 level on December 31. The market cap of the asset class as a whole moved from $220.249 billion at the end of Q3 to $191.935 billion on December 31, down 12.86% for the three-months as Bitcoin kept pace with many of the other tokens in the final quarter of 2019. Ethereum posted a 26.79% loss in Q4, while Litecoin was 25.30% lower for the period. Bitcoin Cash was 9.55% lower. The Chinese government crackdown on the cryptocurrencies weighed on the asset class in Q4.
Issues to look forward to in Q1 2020
The dollar moved 2.99% lower in Q4 as the Fed cut the short-term Fed Funds rate three times by a total of 75 basis points in Q3 and Q4. The central bank ended the quantitative tightening program that was pushing rate higher further out along the yield curve in Q3. The Fed did not change monetary policy at the final meeting of the year in December. As 2020 is a Presidential election year in the US, and the central bank is an apolitical body, the Fed Fund rate is not likely to change until after the November election.
The most significant move to the upside in Q4 came in the coffee market. The price exploded higher on a warning from the International Coffee Organization that 2019/2020 is an off-year for production from Brazil, the world’s leading producer and exporter of Arabica coffee beans.
The weekly chart shows that nearby coffee futures rose from just over $1 per pound at the end of Q3 to a high of $1.3840 on the continuous futures contract. The active month March contract rose to a high of $1.4245 on December 17. At $1.2970 per pound on December 31, price momentum and relative strength indicators were in overbought territory going into 2020.
Meanwhile, the quarterly chart shows that price momentum crossed higher, and the soft commodity is going into the new decade on a positive note. Arabica supplies and the Brazilian real versus the US dollar currency pair will determine the path of least resistance for coffee futures in 2020. The real continues to bounce along the multiyear low throughout 2019. A long-overdue recovery in the Brazilian currency would likely support a continuation of the rally in the coffee futures market that began in Q4.
The commodities markets will be facing a myriad of issues in Q1 2020. Progress on a comprehensive trade deal between the US and China will continue to be a dominant force. The “phase one” agreement in Q4 caused optimism to return to markets. Protectionist policies distort supply and demand fundamentals. Tariffs create gluts in one region and shortages in others, as we had witnessed in the US and China in the agricultural sector. Prime Minister Boris Johnson’s impressive election victory on December 12 paves the way for Brexit by the end of January, which could lead the pound and the euro higher against the US dollar.
Iran remains a clear and present danger to peace in the Middle East. At the same time, North Korea increased its rhetoric aimed at the US in Q4 and began test-firing missiles again, which could cause fear to return to markets over the Korean peninsula. The protests in Hong Kong continue to threaten a severe reaction from the Chinese government. A faceoff between protestors and the leadership in Beijing could also result in risk-off behavior in markets.
The House of Representatives impeached US President Donald Trump on December 18. A trial in Senate will take place in January. As not one Republican in Congress voted in favor of impeachment, an acquittal is almost a sure thing, unless other charges appear before the proceedings. Meanwhile, the Speaker of the House had refused to send the articles of impeachment to the Senate as of the end of the year. Nancy Pelosi and the Senate Minority Leader, Chuck Schumer, made demands about witnesses and the structure of the trial, but the Republican leader of the Senate refused to acquiesce to their demands as of the end of the year. At the end of Q4, former Vice President Joe Biden continue to lead in the polls for his party’s nomination to challenge President Trump. Senators Bernie Sanders and Elizabeth Warren support a progressive agenda, which would result in significant changes to the tax and regulatory landscapes in the US. Both Senators plan to adopt the “Green New Deal” that would change the landscape for fossil fuels in the United States. Together, the progressive Senators hold a more significant percentage of national support than Joe Biden, which could set the stage for a brokered convention. In Q4, former NYC Mayor and billionaire Michael Bloomberg threw his hat into the ring in a self-financed effort to capture the nomination of Democrats. While the primaries will get underway in February, Bloomberg’s plans are centered around the super-Tuesday primaries in early March. The bottom line is that more than a few issues and the unknown could trigger risk-off periods in markets across all asset classes in Q1 and throughout 2020, and commodities are no exception.
History- Results from my best bets for Q4
The results of my best bets for Q4 from my Q4-2019 report are as follows:
- The stock market could become highly volatile in Q4 with the many issues facing the US and world at large. I continue to favor buying VIX-related instruments on price dips
The stock market rallied steadily throughout Q4 to record higher. However, there were opportunities to buy the volatility products on dips and take profits, but the VIX remained close to the lows throughout most of the quarter.
- The dollar index will likely challenge the 100 level in Q4 as the pattern of higher lows, and higher highs continue even though US rates have declined
The dollar index did not make a new high in Q4 and 99.33; the September high remains the critical resistance level. More certainty about Brexit following the UK election caused the pound and euro to rally and the dollar index to decline.
- Bitcoin fell to what could the bottom of its trading range in Q3 at under the $8000 level. I would be a light buyer of the leader of the digital currency asset class with a stop below the $6500 level
Bitcoin was under pressure throughout Q4 as the Chinese government cracked down on cryptocurrencies. The move by China was a bearish fundamental factor for the asset class.
- Despite losses in Q3, 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
The Canadian dollar moved higher in Q4, and the Brazilian real posted a marginal gain after falling to a lower low than in Q3.
- The British pound is likely to become highly volatile in Q4, and price variance could reach levels not seen since the early 1990s when the pound fell below its ERM range. A hard Brexit would likely be bearish for the pound and could send it to parity against the US dollar. An agreement or decision to stay within the EU could ignite a significant rally in the pound. I will be looking to go with the flow if the Brexit issue gives way to some certainty either way.
The December 12 election pushed the pound to over the $1.35 level against the dollar before it corrected to around $1.315 at the end of Q4. The election results were bullish for the pound as they pave the way for Brexit with a deal between the UK and EU.
- I continue to favor the long side in gold, but the risk has increased with the price of the yellow metal. If gold is going to make new highs in Q4, gold mining stocks are likely to outperform the yellow metal on a percentage basis
Gold spent much of the last quarter of 2019 correcting and consolidating, but every dip was a buying opportunity in the yellow metal, which closed the year over the $1500 per ounce level. Mining shares also bounced from dips during the quarter that ended on December 31
- Like gold, the risk in silver has increased with the price. We are likely to see wide trading ranges in the silver market. I continue to favor the upside and will use price weakness as a buying opportunity. I will use tight stops, and look to re-enter on the long side of the market if stopped out
Like gold, silver corrected and consolidated in Q4, but every dip created profitable buying opportunities in silver and silver mining shares.
- 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 moved higher in Q4, and dips were a buying opportunity.
- Copper is a barometer for trade between the US and China. An escalation of the trade war will cause the price to decline, while de-escalation or a deal could cause a significant price recovery. I believe China needs a deal from an economic perspective and the US from a political perspective. I will look for buying opportunities on price dips in copper or DBB, FCX, and SCCO shares
Copper posted an 8.5% gain on the quarter on the back of the de-escalation in the trade war between the US and China. Copper was around the $2.80 level at the end of 2019. Copper, DBB, FCX, and SCCO were all higher and any dip during the quarter led to a profitable buying opportunity
- I will be keeping a close eye on the nickel market in Q4. The export ban in Indonesia, the world’s leading producer, will take effect on January 1. Buying dips in nickel is dangerous but could be the optimal approach to the market. 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 by almost 19% in Q4 and was the worst-performing base metal over the period.
- Grain markets will reflect the ongoing trade war between the US and China in Q4 as well as the direction of the US dollar. The market will focus on South American weather throughout the coming three months as that will determine day-day price action in the absence of any news on trade. A trade deal would likely lift the price of soybean futures with corn and wheat going along for the ride
Soybean futures fell in October and November, but the “phase one” trade deal lifted prices in December. Wheat moved steadily higher throughout the quarter.
- The KCBT-CBOT wheat spread at an 80.75 cents premium for KCBT is at near a historical high. I favor eventual mean revision in the spread as the long-term average is a 20-30 cents premium for CBOT over KCBT wheat
The spread fell to a new low but recovered at the end of Q4 to under the 80 cents level on the March futures contracts.
- Iran is a significant issue in the crude oil market. I will look for buying opportunities in the energy commodity during periods of price weakness. I will be using futures and the UCO and SCO leveraged products for short-term trading. I continue to believe that oil-related shares offer value for the coming months and would be a buyer of the OIH and XLE ETF products on price weakness with tight stops
Crude oil moved higher in Q4. Energy shares also posted gains but continued to lag the price action in the energy commodity. Buying shares and oil on weakness was a profitable approach to the market over the three months.
- Crude oil processing spreads are likely to reflect seasonality in Q4 with weakness in the gasoline crack spread and strength in the heating oil crack, which is a proxy for other distillate products
Gasoline crack spreads outperformed heading oil crack spreads in Q4, but both posted losses.
- Natural gas is limping into Q4 after moving from $2.029 to $2.71 in Q3. I believe that price weakness in October is a scale-down buying opportunity. However, I will be buying call options on NYMEX futures for January and February expiration to limit risk on the downside. I will use the UGAZ, and DGAZ ETN products, as well as the GASL product, as the leveraged tools magnify the price action in the future arena
Natural gas rallied to just over the $2.90 level in early November, but the market ran out of upside steam and declined throughout November and December. While long-side positions in the natural gas market were losers, GASL was a surprise winner as the product staged an impressive recovery that more than covered losses on products with tight stops.
- I continue to believe that sugar, coffee, FCOJ, and cotton are close to the bottom end of their respective pricing cycles. I would be a buyer on price weakness but will keep an eye on the Brazilian real for all but cotton. Brazil is the dominant producer of sugarcane, Arabica coffee beans, and oranges. The currency will have an impact on prices. Cotton is a soft commodity that is a barometer for the trade war between the US and China
FCOJ posted a marginal loss in Q4, but sugar, coffee, and cotton all posted double-digit percentage gains. The soft commodities sector was the leader of the asset class in Q4.
- Meat prices are in the heart of the offseason, but the lean hog futures are most likely to have a high sensitivity to any de-escalation in the trade war. China is suffering from a shortage of pork because of African Swine Fever and needs to import US pork to meet requirements
Live cattle continued to rally, and hogs posted a gain in Q4 because of the shortage in China. Hogs came back at the end of Q4 and moved over 70 cents per pound.
- Falling interest rates in the US should support new home building. While lumber is an untradeable futures market, WY, WOOD, and CTT correlate with the price of lumber-I view price weakness as a scale-down buying opportunity
Lumber posted a double-digit percentage gain in Q4 and shares of WOOD, WY, CTT all posted gains.
- Uranium at under $26 remains in the buy zone. I favor UUUU and CCJ shares with a stop in Q4
Uranium did not recover in Q4 and remained around the $25 level. UUUU shares edged lower along with CCJ shares.
Best bets for Q1 2020- Commodities
As we move into Q1 2020, there are lots of events that will move markets across all asset classes.
My best bets for Q1 are:
- 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.
- 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.
- 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.
- 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.
- 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.
- I am bullish on gold and gold mining stocks in Q1. However, the risk of long positions will rise with the price.
- I am bullish on silver and silver mining stocks in Q1. However, the risk of long positions will rise with the price.
- 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.
- 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.
- 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
- 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.
- 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 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.
- 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.
- 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.
- The risk in coffee has increased with the price, but I continue to favor the long side because of the off-year 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.
- Cattle are expensive, and hogs are cheap. I favor lean hogs on the long side with tight stops.
- 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
- Uranium at under $26 remains in the buy zone. I favor UUUU and CCJ shares with a stop in Q1
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 election in history in November. We are likely to see markets begin to move with the political polls during the second half of 2020. In Q1, it would be wise to expect the unexpected. We are heading into 2020 with optimism peaking, which could be a sign that volatility in markets across all asset classes is just around the corner.
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 $1.34 billion in net assets, which dropped by $80 million from the end of Q3. The product trades an average of 1,087,716 shares each day, which is 115,241 shares higher than at the end of Q3. In 2019, net assets dropped by $680 million.
As the chart shows, DBC moved from $15.04 at the end of Q3 to $15.95 per share at the end of Q4, a rise of 6.05% for the quarter. DBC marginally underperformed the asset class in Q4 as the composite of 29 commodities rose by 6.47%.
Many opportunities lie ahead in the commodities markets in 2020. Commodities are volatile assets and trading rather than investing is likely to yield optimal results. Keep your stops tight and take profits when they are on the table. Never worry about missing a trade or investment because there is always another opportunity just around the corner. Discipline, a logical risk-reward approach using stops, and flexibility are critical elements for success in the world of commodities. Keep your eyes on US interest rates and the dollar, the trade negotiations with China, and Iran. Other factors will also likely impact markets as the economic and geopolitical state of the world is dynamic as we head into a new decade.
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.