There are a few key issues that have to be answered to be a commodity index investor even in the short-run.
- Where is the global business cycle? - Commodities peak late in the cycle and there generally has to be higher than expected growth to create excess demand for commodities.
- Are there current supply shocks? - Along with strong demand, commodity investing needs to expect or have supply shortfalls for prices to rise.
- Are commodity inventories low? - For unexpected demand or supply shocks to significantly affect prices, commodity markets need to be in a lower than normal inventory environment.
- Are commodity markets in backwardation? - The negative carry from market contango bleeds money for investors. Index investing needs backwardation condition in futures which has not been the case for most of the post Great Recession period.
- Is there higher inflation? - While many have discussed the relationship between commodity investing and inflation, the link has been highly variable. Commodities have not been a reliable inflation hedge over the last ten years. Of course, this has also been a period of deflation or low inflation around the globe. Short-term dynamics and contango will dominate commodity index price moves in a 2% or less inflation world.