Friday, 6 July 2012

Commodities (Update)

Commodities are volatile. 30 days since I published how to invest in commodities prices have changed a fair amount and the list and opportunities are constantly changing.

If you remember last month the top commodity to invest in was wheat. Since then wheat prices have increased by 34% (the biggest increase of all the commodities we are following). Wheat remains the top commodity due to the fact its the best value commodity that is currently uptrending. Last month the expected returns on wheat were about 5% but due to significant price rises the expected return has now dropped closer to 2%.

The table below gives the current figures. I've also include the current price compared to its all time high price for each commodity. (Soybeans are currently trading at all time highs):

Commodity Price Target Expected Return Trend Last Month Change All time high Current price to all time high
Natural Gas 2.95 15.04 17.69% Down 2.42 22% 20.74 -86%
Crude Oil 87.22 127.24 3.85% Down 85 3% 178.7 -51%
Cocoa 2350 3123 2.88% Down 2203 7% 3833 -39%
Platinum 147.77 185.67 2.31% Down 147 1% 241.6 -39%
Wheat 838 1036 2.14% Up 625 34% 1647 -49%
Copper 3.49 4.26 2.01% Down 3.38 3% 4.75 -27%
Heating Oil 2.77 3.35 1.92% Down 2.68 3% 4.66 -41%
Coffee 180.45 216.61 1.84% Down 156 16% 326 -45%
Cotton 72.6 82.82 1.33% Down 70 4% 180.8 -60%
Silver 27.67 29.68 0.70% Down 29.49 -6% 50.18 -45%
Soybean Oil 55.13 57.71 0.46% Down 49.25 12% 74.61 -26%
Oats 364 380.61 0.45% Up 295 23% 550 -34%
Sugar 21.98 22.83 0.38% Down 19.9 10% 33.82 -35%
Gold 1609 1485 -0.80% Down 1635 -2% 1935 -17%
Corn 708.5 611.4 -1.46% Up 587 21% 835 -15%
Soybean 1527 1272 -1.81% Up 1387 10% 1529 0%

Natural gas is clearly looking interesting and it's getting very close to its 100 day high which would indicate a up trend and a signal to open the trade:

The black dotted line is the target. It looks high in this chart but it is based on the 2000 day (8 year)(red dotted line in the chart) average price plus 1.282 standard deviations. Looking at a longer term chart shows the target as ambitious but not completely unreasonable:

As you can see natural gas has taken a marvellous beating over the last 4 years (never once has it broken its 100 day high signalling a trade) and is currently 86% below its all time high of almost 21. We have been waiting patiently. Even if it doesn't get to its target of 15 getting to 6 would double your money and it would still be cheap by historical standards.

Lat month gold was at the bottom of the table with a slightly negative expected return. It has fallen about 2% in the last 30 days.

I have to say none of the commodities at present look super expensive. Even though I give gold a negative expected return I would not short it. I would simply not buy it at these levels and maybe sell some if I was holding any significant amount of it. I actually hold just over 1% of my assets in physical gold (coins). My average buying price is around 46% below today's price and I enjoy holding something decorative and physical. If they made up 5% of more of my total portfolio I would consider selling some just to rebalance and take profit.

Corn and Soybeans are starting too look expensive, but their current uptrends make them too dangerous to short. the current best course of action is to simply wait for natural gas to break it's 100 day high. The expected returns on wheat are really too low to bother with now, if you hold wheat then keep it for now as it looks the best commodity although there would be no shame in taking profits on this one and investing elsewhere. It depends on your preferences and how much importance you place on holding some commodities in your portfolio.

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