It's time to keep an eye on commodities as an asset class
Key points
- Commodities as an asset class have enjoyed a nice upside reversal in the last month - metals, in particular
- Could this rally continue? Absolutely - particularly if metals continue to surge
- There is no reason to fight the current uptrend in commodities
- However, given the strongly cyclical nature of commodities, seasonality suggests being cautious in betting heavily on this asset class in the near term
Commodities are trying to establish a new uptrend
As I wrote about here, here, and here, it is reasonable to expect commodities as an asset class to be a top performer in the years ahead. In the here and now, the chart below shows the Bloomberg Commodity Index (BCOMSP) action. Following a 150% surge from the 2000 low to the 2022 peak, the index retraced roughly 50% of that move before bottoming in February 2024. Since then, BCOMSP has advanced 11% and moved back above its longer-term moving average.
Could this rally continue? Absolutely. Metals have been leading the way, and if gold, silver, and copper break out to new highs, the momentum could spill over into different commodity sectors. The trend must be considered favorable as long as BCOMSP holds above its 200-day moving average.
But there are reasons to be wary in the near term. As an asset class, commodities tend to react well to fears of rising inflation. The stock market interpreted the latest CPI numbers as cooling inflationary fears. If the commodity markets interpret them the same way, it could dampen commodity prices. The other concern is the seasonal nature of commodity price movements.
Commodities have entered a typically unfavorable seasonal period
The chart below displays the annual seasonal trend for the Bloomberg Commodity Index, with the brown line representing the price action for 2024 so far.
Note the period highlighted in the red box, which extends from the close of Trading Day of the Year (TDY) #90 through TDY #122. For 2024, this period extends from the close on 2024-05-09 through 2024-06-26. It should be noted that so far, BCOMSP has already advanced 1.5% since the May 9th close.
How concerned should traders be about the potential for a reversal in commodities as an asset class? Let's take a look at history. We can look at BCOMSP data from 1960. The chart below displays the hypothetical growth of $ 1 holding a long position in the Bloomberg Commodity Index only from TDY #90 through TDY #122 every year starting in 1960.
The table below summarizes wheat performance during this seasonal period.
What the research tells us…
Commodities as an asset class are surging. There is presently no reason to fight the trend. Nevertheless, traders should not throw caution to the wind. A 31% Win Rate tells us that a decline for the Bloomberg Commodity Index during the impending seasonal period into late June is not a sure thing. However, the history above suggests that traders employ much caution if choosing to play the long side of commodities in the months ahead. Meanwhile, while it is always perilous to countertrend trade into the teeth of a strong trend, aggressive traders may do well to watch closely for an opportunity to play the short side IF an obvious reversal takes place (for example, if silver were to close back below 30).