Saturday, November 14, 2015

Commodities still played best from short side

With continued slower economic growth around the world further confirmed by the recent OECD forecasts and inflation in the developed world that persists below 2%, the macro story for commodity buying is poor. Add to this environment continued price devaluation from the super-cycle and there is little reason to be a long-only investor; however, that does not mean there are no commodity opportunities. 

Active commodity trading can be a way to take advantage of this change in the super-cycle, the deflation threat, and revaluation in emerging markets. It calls for careful analysis and a willingness to let go of any thinking about commodities as a stable long-only asset class.

Competition has declined in the commodity markets. The AUM from commodity investing has fallen by 45% from the highs of over $250 billion in 2011. Hedge funds have exited the business. Banks have exited the business. Trading firms have cut back their exposure. Lending and financing in commodities is harder to come by. This all means that for those left there are more opportunities, but these opportunities are consistently on the short side of the market. That direction may change when there is further rationalization or a unexpected supply shock, but right now there is nothing that would call for a long bias other than some sense of price extremism.

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