Head of Commodity Strategy
Summary: The Bloomberg Commodity Index Total Return index managed a small positive return last month, the first in four months, with gains in energy and softs offsetting losses in grains and metals, both precious and industrial. January was generally a month where investors were net sellers of commodity tracking ETFs with the biggest reductions seen in those tracking crude oil, natural gas, and not least gold, while flows were seen into silver and copper, as well as those offering a broad-based exposure to commodities
The Bloomberg Commodity Index Total Return index which tracks the performance of 24 major commodity futures spread between energy, metals and agricultural, managed a small positive return last month, the first in four months, with gains in energy and softs offsetting losses in grains as well as metals, both precious and industrial. Excluding natural gas, which slumped by close to 10% last month, the BCOM index returned 1.3%. On an individual level, major gains were seen in sugar, cocoa and diesel. The two soft commodities being supported by tight supply amid expectations for a drop in Indian and Brazilian sugar production while recent data on port arrivals in top grower Ivory Coast has trailed last year’s figures amid dry weather and crop disease.
Diesel prices in London and New York rallied strongly amid logistical challenges in the Red Sea where Houthi attacks have forced the redirection of shipments to Europe, forcing them onto longer voyage times, and hence higher freight costs. In addition, the mid-January US cold ‘bomb’ drove a demand spike while recent drone attacks on Russian energy facilities have also increased supply concerns.
Besides the slump in natural gas following a mid-month spike, weakness continued to be concentrated in the grains sector, with ample global supply ahead of the start of the northern hemisphere planting season being the main culprit for lower prices. The BCOM grains TR index closed last month at the lowest level since November 2021 after suffering a 4.7% loss, a development that has seen speculators accumulated the biggest net short since May 2019.
Industrial metals traded mixed with a second consecutive monthly loss being led by losses in nickel and aluminum, both currently seeing ample supply, while copper managed a small return amid short covering after the demand outlook brightened after the People’s Bank of China, in their latest efforts to prop up the economy, surprised the market by announcing a bigger-than-expected cut in its reserve requirement ratio. Precious metals meanwhile traded lower but with gold showing underlying strength after recording a small loss compared to the adverse strength seen in the dollar.
A great deal of action was also seen in commodities that are not represented in the BCOM Index, most notably sport uranium U308 which continued its month-long rally amid a tightening supply outlook as major miners struggle to keep up with demand. Not least Kazakhstan’s Kazatomprom,the world’s top producer, who have lowered their 2024 production guidance by 9.3 million pounds or 14.2%, siting limited access to sulphuric acid. Other non-BCOM members such as EU TTF gas and platinum also suffered declines, with the latter seeing thediscount to gold hitting a record high above $1100 per ounce.
How did ETF investors respond to these developments?
The table below show some of the world’s largest and most actively traded commodity ETF’s, their recent performance and not least recent investor flows. There are many ETFs tracking commodities so the list is by no means exhausted and should primarily be used for information and inspiration.
The first section are UCITS-compliant ETFs and are based on an EU directive that provides a regulatory framework for funds that are managed and based in the EU. A UCITS fund can be marketed to and traded by private investors because it adheres to common risk and fund management standards, designed to shield investors from unsuitable investments.
The second part of the table shows mostly US listed, and therefore non-UCITS compliant ETFs. It’s among this group we find some of the world’s biggest ETFs in terms of market cap, led by the GLD and IAU, two ETFs that tracks the performance of gold. It is also worth noting that due to changed taxation rules by the US Internal Revenue Service, Saxo no longer offer access to cash trading in PTP securities. We chose to show the PTP registered ETFs given the signal value they can provide, but also the fact that traders understanding the added risks of holding leveraged positions can still trade these as CFD’s.
Looking at recent flows, January was generally a month where investors were net sellers of commodity tracking ETFs with the biggest reductions seen in those tracking crude oil, natural gas, and not least gold. However, the limited (negative) price impact of this gold selling highlights an underlying physical demand which is not visible in the so-called ‘paper’ market. Instead, it is driven by continued strong demand for physical gold from central banks and China’s middle class trying to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan.
At the top of the list, besides silver and copper, we see continued demand for broad-based exposure to commodities. Despite a prolonged period of sideways trading action, the long-term ‘electrification of the world’ investment case for copper continues to attract demand from investors that a not time sensitive. It is also worth noting that demand from investors looking for a broad commodity exposure continue to rise, albeit at a slow pace, perhaps a reflection of a market where investors see upside potentials driven by tight supply of key commodities and incoming US rate cuts lowering the cost of money, thereby supporting a period of restocking by industries.
An example of a BCOM tracking ETF, is the $2.2 billion market cap Invesco Bloomberg Commodity UCITS ETF. As per the chart below, the ETF surged 132% from the Covid-19 low in March 2020 until June 2022 before giving back around half those gains. During the past year, the index has traded mostly sideways within a narrowing range as the commodity market absorbed the negative impact of rising interest rates across the world as well as a slowing China and growth concerns elsewhere. The ETF is currently being supported around 21.38 with the prospect for an upside break requiring the ETF to rally by at least 4% from the current level around 22.
Commodity articles:
30 Jan 2024: Gold and silver looks to FOMC for direction
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
Previous "Commitment of Traders" articles
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
2024: The wasted year
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With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
