Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Commodities: A Better Long-Term Bet?

Published 04/25/2014, 10:28 AM
Updated 07/09/2023, 06:31 AM

For longer-term investors, equity markets have generally remained the risk asset class of choice. However, with equities around the world now finding it hard to continue the bullish momentum of the last few years, investors are now looking to alternative markets to diversify risk, and for potentially better returns. One such is commodities, which has performed well since the start of the year, with the Dow Jones Commodity index currently up 10%, compared with to just 2% for the S&P 500. In addition, and perhaps more significantly, many of the traditional correlations between equities, bonds, commodities and currencies, and in particular the risk-on-risk-off relationships, have all broken down as the financial markets continue to be distorted by quantitative easing.

Backwardation

This has helped to re-establish the fundamentals of supply and demand in the commodities market, and one only has to look at US Coffee C, which has risen dramatically this year following the severe drought in Brazil, with Nickel another example. The rise in Nickel followed the decision by Indonesia to ban exports in January, leading to strong gains for the metal as a result. Finally, backwardation is also playing its part in many commodity markets with spot prices leading the futures, and as such, offering investors opportunities for better returns when rolling over contracts.

However, while the above are all positive reasons for considering commodities for longer-term investments, China remains the dominant force in the market, both as a consumer, stockpiler and supplier, and any signs of an economic slowdown could seriously influence the supply demand relationship. While some commodities have performed well, others have struggled gain any momentum, with Gold and Silver both consolidating following steep declines, along with Copper. Crude Oil continues to remain range bound with the WTI contract currently struggling to breach the $105 per barrel area, which remains firmly resistance. US Soybeans on the other hand are offering excellent returns due to the bakwardation now in place.

As with all markets, picking the winners is hard, but with the fundamentals of supply and demand now starting to take centre stage once again, and with a helping hand from backwardation, perhaps now is the time to dip a toe back in this risky market. And of course, there is always volume-price analysis to help to confirm the supply and demand picture on the price chart.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.