COMMODITIES
BACK TO THE FUTURES The buying and selling of commodities dates back over six thousand years – futures trading is believed to have originated in ancient China, part of society’s response to the realization that certain crops could not be produced yearround. Today, it’s oil and gold rather than rice that dominate the marketplace, but the concept of setting a future price for a product with different production variables remains the same. Christopher Foster is the founder of Blackheath Fund Management, which offers clients access to the Blackheath Tactical FI Strategy for bond market exposure, as well as a more traditional commodity futures product, the Blackheath NewTrend Strategy. According to Foster, finding returns using these types of funds has been challenging lately. “Blackheath New Trend Strategy, COMMODITIES: THE TRUMP EFFECT CHANGE IN PRICE SINCE NOVEMBER 8, 2016
-5%
0%
5%
10%
15% 20% 25%
Steel*
Oil
Aluminum Corn
Gold *US hot-rolled coil steel
like all trend-following strategies in the commodity space, has been sucking wind,” he says. “That space has done nothing but lose money for years now.” In Foster’s opinion, the industry has suffered from too much of a herd mentality, which is stifling the ability to generate returns. “There is too much money chasing the same signal,” he says. “There is trendiness in markets that people have assumed is immutable fact. The broad, trend-
climbing back above US$60. “I think crude oil will come down again,” he says. “These are great prices for shale products – the regulatory yoke has been taken off; they presumably will get tax cuts and start drilling like crazy. So that will have downward pressure on the oil price.” Gold had a tempestuous 2016, and Foster expects that central bank policy and potential inflation in the US will drag on the bullion price this year, although it retains its safe-haven qualities.
“I believe there is too much money in this space – $400 billion chasing the same signal, with more piling in” Christopher Foster, Blackheath Fund Management following indices in the commodity space are basically at the same place they were three or four years ago.” This inertia is nothing new in this space, but the length of this particular stretch is rather concerning for traders like Foster. “There have been periods like this before,” he says. “The late ’80s was very difficult for trend followers, but this is a long time to not make money. I believe there is too much money in this space – $400 billion chasing the same signal, with more piling in. Assets under management in the trend-following space hit a new high last year.” One factor that may work in the favour of the futures markets is the new administration in Washington. Donald Trump’s proposed US$1 trillion infrastructure plan has precipitated a rally in steel since the election. Oil has also made significant recent gains, buttressed by the OPEC agreement signed in December. Regardless, Foster advises against any speculative trades on oil
“It will be more of the same for gold this year,” Foster says. ”The US dollar is quite strong and real interest rates are improving, but we have political instability, so it will continue to go up and down. The bull market for it really ended in 2011.” Outside of oil and gold, investors could put their money into agricultural commodities, although political uncertainty is a factor here too, particularly if the US enacts protectionist policies and provokes a trade war with other nations. Domestic turmoil in producer nations is another consideration to take on board, as well as variables such as the weather. “The soft commodities are well positioned,” Foster says. “Coffee, sugar, cocoa really haven’t done much yet, but they do profit from instability. Two-thirds of the world’s cocoa production is in West Africa, which is always capable of going off the rails. In an environment when we have good economic growth and political instability, there will be opportunities for commodity trading.”
Source: Thomson Reuters Datastream, February 14, 2017
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