Commodities Update- August 31, 2021

In the Gulf of Mexico, US oil producers partially shuttered production in anticipation of the tropical storm Ida. Brent and WTI crude futures surged higher over the weekend in face of uncertainty but have stabilized after producers reported little to no damages. Coffee futures are on the rise as Vietnam, one of the worlds largest producers of robusta coffee, sees lockdowns affecting the country’s ability to export

The chart below shows the proportion of commodities with a positive return over 1-month and 3- month periods. The percentage of commodities with a positive return over the past month has seen a moderate increase from 29% to ~36%. The 3-month trend has seen a smaller increase from ~61%. to ~65%

 

This month’s biggest winners in commodities are sugar, wheat and natural gas with gains of ~11%, ~7% and ~6% respectively. Sugar and wheat futures are up still due to the adverse weather conditions affecting production in Brazil and the US. The biggest losers of the month consist of lumber, soybean oil and silver.  Lumber has been plummeting for quite some time now as the market has corrected from the astronomical prices seen in early May. Lumber dealers are even starting to report excess lumber inventory as they ramped up production while consumer’s tried to avoid paying exorbitant prices these past months. 

 

The following chart shows the average correlation between each commodity and the underlying commodity spot index (Bloomberg Commodity Spot Price Index). At the peak of the commodity rally, the rolling correlations exceeded 60%, representing the unified climb in prices across most commodities. Since then, the rolling correlations have dropped significantly and have begun to move sideways in recent weeks.

 

 

Net long positioning by managed money saw no change over the week after it ticked higher for the first time in months last week.  Net-long positioning by managed money reach  ~82% at the height of the commodity rally but now  sits at ~71%. We anticipate another retreat in the breadth of long position over the coming week(s).

 

 

How are commodities performing compared to previous economic recoveries? In the graph below we have moves by commodities following an economic recovery since the 1960’s. We are at a period following the recovery where commodities tend to move sideways before eventually trading higher. Up to this point we have been following historical precedent but will be watching for further developments.

In recent weeks/months we have seen renewed talks of gold as safe investment in the face upcoming economic uncertainty (tapering).  We modeled the price of gold using a plain vanilla linear regression using the following inputs: US 10-year TIPS yield, US 10-year TIPS breakevens, global financial stress index, economic policy uncertainty( measured via news trends) and US dollar implied volatility. Our model had an r-squared of ~80% with all data in sample. At this point in time it seems the model estimate is roughly in line with the current price of gold. How does gold move forward? It is not clear, as contractionary monetary policy by the Fed will create downward pressure on the price of gold but also exacerbating financial stress on consumers. On the other hand an increase in consumer financial stress will have the opposite effect on gold as many will turn to gold in the face of uncertainty. In the end it seems as if though gold is stuck where it has been the past few months, relatively flat. 

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