Happy new year! In this episode, I'll provide an overview of commodity market performance in Q4 and expectations going forward. The commodity price rally appears to be slowing, which could point to lower returns this year. The copper/gold ratio, a gauge for risk-on/risk-off, is testing resistance similar to 2018, which preceded pullbacks across risk assets including equities and commodities.
Commodity rally appears overbought, expect some pullbacks
The commodity price rally appears to be slowing, which could point to lower returns this year. Several overbought signals were confirmed over the past few months, especially in natural gas, which declined more than 30% in Q4. As expected, the dispersion in commodity returns narrowed over the past quarter as earlier declines in metals and agriculture stabilized. The US dollar remains a wildcard, which has strengthened along with commodities over the past few months. Meanwhile, commodity currencies such as the Australian and Canadian dollar have lagged the upside in commodities.
Trading performance was positive in Q4, which made up for some losses in Q3. Short natural gas was the best performing trade, while a short-term buy in soybean oil detracted from gains. Overall performance in 2021 was positive, although most of the strategy’s gains were realized in the fourth quarter of 2020 around the start of the commodity rally. Recent volatility has led to choppy trading conditions, which means the strategy will be more selective with positions.
Read the full report here